scared to death of the word "performance" because performance now has more connotations of what are you going to do tomorrow in the marketplace.

And, incidentally, I would like to comment on those 30 tired industry stocks that certainly came to life this morning.

But I think the performance measure is pretty will delineated in the prospectuses of the mutual funds themselves. How well have they done?

The historical record basically is the most important thing any investor can go on. And here again is one of the most important things very little has been said about, although it was touched on this morning. And that is we are also dealing in an area of actual disclosure. There is not one thing with respect to the management fees or sales charges that is not fully disclosed to a prospective investor. And I think this a very important consideration that should not be lost sight of.

But I would be extremely concerned over saying that a management company or its advisers or owners or trustees could be compensated even in some measure on the relative future performance of the fund because we would have the swingingest operation in the stock market you ever saw if that were part of the base. And that is one of my fears. Senator PROXMIRE. I have one other question, and I apologize for keeping you so long. And that refers to your position on the front-end load.

This is interesting because you have a very definite position that attempts to contradict the position of the other witnesses. But it does raise a question that bothered me a great deal, one raised by Chairman Cohen. And that is, Do you not have a situation where an investor who makes a small investment and as you indicate with a front-end load has to pay a disproportionately high part of that in the first year, is he not put in a position where even against the interests of his family and himself-he may have reverses, for example, suffered a demotion or lost his job or any number of things can happen-he may feel impelled to carry on with this fund, with this investment, because if he does not, he suffers such a dramatic loss.

Mr. DAVIS. That has been part of our concern, Mr. Chairman, although I must admit some of the arguments or statements I heard yesterday, particularly by former Postmaster General Day, to me were some of the greatest statements about why a salesman should be allowed to be a salesman I ever heard in my life. And I think some of the explanations of benefits of contractual plans and some of the figures that were brought out

Senator PROXMIRE. Unfortunately, I was not here. I will review that testimony.

Mr. DAVIS (continuing). I thought were rather significant.

I would not say it exactly made me change my mind at this point because I believe that the companies themselves have already attempted to offer, not compromises, but other suggestions along these lines with the Commission and have received to date and, as I say, this is hearsay as far as I am concerned-rather deaf ear.

Senator PROXMIRE. Senator McIntyre.

Senator MCINTYRE. Thank you, Mr. Chairman.

I, too, have been puzzled about whether these advisory fees are excessive or not. And I have to agree with Senator Proxmire that we have to get some area to relate them to.

But on page 106 of this book of implications of investment company growth, in talking about the MIT and the MIGS complex, it is interesting to note that salaries and annual salaries of the principals in the first case, $621,922, the second $458,000, $196.000, $493,000-they all look like gross estates.

(The table referred to follows:)

1 Does not include accruals for retirement benefits which accounted for an additional $0.1 million. 2 Trustee until Feb. 15, 1965.

3 Trustee from Feb. 15, 1965.

Senator MCINTYRE. I think in talking to Senator Proxmire yesterday, certainly I do not raise my eyebrows at this if these men are worth it and do the job for these funds as they apparently have, but I do not know whether we have to come to the conclusion that I think you said whether these advisory fees have been proved to be too high. before this committee as far as testimony is concerned. This testimony is only one part of our deliberations.

Senator Proxmire also touched on both other questions that I wanted to ask. And that goes to that self-regulation.

Mr. Day, you seemed to indicate you think it has some promise. Mr. DAY. I think it has worked very well, Senator; yes.

Senator MCINTYRE. And you are taking into account of costs the fact that your experience has been based on a membership in the Midwest Exchange?

Mr. DAY. That is correct, sir.

Senator MCINTYRE. You know, of course, we are going to apply this to a bigger field, whereas some of the prior witnesses have said they would not have that element of control you gentlemen enjoy on the exchange, but you still feel this has an area of promise and possibility?

Mr. DAY. Well, as you know, Senator, our industry is interlocked to a great degree. Those producing the biggest amount of business in the listed securities, mutual funds, over-the-counter securities, are all members of the New York Stock Exchange, our exchange, members of the NASD. We will all have a pretty good opportunity to see how these things work in all these areas.

I think the NASD has done a great job. Sure, just as we can find fault with the SEC, they can find fault with our regulations. But when you look at this on balance, the tremendous amount of money that people have put in securities, I think the NASD, every regulating body, has done a remarkably good job.

One of the areas we could improve would be better liaison between our associations that for some reason we do not have now. I think this would be very helpful. And I also think it would be very helpful if the SEC would talk to us as a unit-since we are pretty much one— rather than unilaterally.

If I may add, too, Senator, on the question of fees, I would think if the SEC comes up here and claims to be excessive they should give you some framework, they should present to your committee some basis on which you could measure it. And I think they would have to include like services if they are going to compare it to banks. Are those services the same?

Just saying they are too much or the fact that the man earns $400,000, I kind of think that is a great idea. That is America to me. And I think for $400,000, we must never forget that, of course, that is not all take-home pay.

Senator MCINTYRE. The staff informs me here that the SEC has given us some guidelines, relative factors, in a memorandum to the chairman. It is enumerated in the legislation. And that simply says what is reasonable is to be determined in the light of all relevant factors, including:

(a) The nature and extent of the services provided;

(b) The quality of the services rendered; and

(c) The extent to which the compensation paid to the management company take into account the economies attributable to the growth and size of the mutual fund, et cetera.

I will have to address myself to these factors here and see if we can apply this slide rule.

Thank you, gentlemen.

Mr. DAVIS. Senator McIntyre, may I say, if the Commission has rendered to the committee through the chairman rather extensive documents on this, I wish that it might be possible for us to see it as well. It might answer a numer of questions that we have.

Senator MCINTYRE. It is in the legislation. It is in the bill.

Mr. DAVIS. Yes.

Our counsel, Mr. Morency.

Mr. MORENCY. Senator, I think what you are reading, parts of it, is the proposed new section 15 (d) of the Investment Control Act of 1940. Mr. Weithers and I made a study of that, and we cannot find too much fault with parts of it. The only thing that concerns us greatly is that it seems pointed in the direction of fostering and creating litigation against fund management to recover so-called unreasonable compensation.

And there is a substantial body of opinion, both in and out of our industry, that it is not a good office of Federal legislation to foster this kind of litigation. There are administrative methods through SEC of dealing with allegedly excessive compensation.

It may sound strange to you to have a lawyer say he does believe in fostering litigation, but I think you can find substantial opinion under another one of our Federal securities laws-namely, section 16 of the 1934 act-that perhaps it has gone too far in fostering private litigation to force the disgorging of so-called short-swing profits on the part of officers and directors and 10 percent owners.

So here is a good illustration of one of the reasons on the technical side that we are not satisfied with this bill. We think the policy ques

tion as to whether you should encourage private litigation here should be decided by the Congress. And we think you should hear from people on this kind of question.

Personally, I do not believe that is a wise thing to do. I do not think that helps investors. I do not think it helps fund management. And with the kind of society we live in now, I think most lawyers are pretty busy, and they do not need this one new piece of available litigation offered to them.

Senator MCINTYRE. Thank you, Mr. Day, and your colleagues.
Thank you, Mr. Chairman.

Senator PROXMIRE. Thank you, Senator.

Thank you, gentlemen, very much. We appreciate your testimony. (The prepared statement of Mr. Day follows:)

STATEMENT OF JAMES E. DAY, PRESIDENT, MIDWEST STOCK EXCHANGE

Mr. Chairman, I am James E. Day, president of the Midwest Stock Exchange, located in Chicago, Illinois. With me today are: Scott Davis, chairman of the board of the Exchange; John G. Weithers, vice president and secretary of Midwest, and Joseph N. Morency, Jr., legal counsel for the Exchange, and a partner of the firm, Spray, Price Hough & Cushman. We appreciate the opportunity you are extending to us to be heard on S. 1659.

Our Exchange has 406 members, and these members presently maintain over 2,700 offices in 655 cities and 49 states. We can assure you that each of these member organizations, its employees and their clients-the investing publicare directly affected by the subject at hand.

Gentlemen, first let me state that the Midwest Stock Exchange believes it has always supported measures that are in the interest of the public. However, we do not equate this interest automatically with reduced cost to investors. If we did, we would have to insist that the Congress reduce costs for all members of the public by doing away with the Securities and Exchange Commission, thereby saving our clientele $17,250,000 for fiscal year 1967 alone. But this would clearly not be in the public interest; and, as a matter of fact, the Midwest Stock Exchange has voluntarily gone on record with the Congress to seek increases in appropriations for the Commission.

Further, contrary to the editorial positions of some financial columnists, we do not equate the public interest with a legislative proposal or recommendation merely because it emanates from the SEC. The Commissioners and Staff of the SEC are human; therefore, they are fallible, and it is for just that reason the Congress and, especially, your Committee must exercise its judgment before an SEC recommendation becomes the law of the land. Since the SEC has presented its arguments for this legislation to the Committee members and their Staff, both in writing and verbally, we welcome this opportunity to express our opinions.

Mr. Chairman, since the SEC has not provided sufficient facts and supporting information to justify these far-reaching proposals, our Exchange will have to go on record in general opposition to S. 1659. It must be recognized that the evaluation of this legislation is complicated by the fact that it is based on an extensive document, prepared by the SEC and submitted to the Congress. This document recommends substantial changes in the areas of stock exchange commission rate structure, reciprocity and other regulatory proposals affecting the operations of the securities industry far beyond the scope of this Bill. However, we submit that these recommendations are correlative; and, though we have tried to limit ourselves to the specific areas of S. 1659, we cannot completely ignore them.

It has been reported frequently in the press that the SEC has engaged in negotiations with various segments of the industry on these proposals, but with no results. We are convinced that the failure to include basic economic data which has been generally recognized as a major shortcoming of the report itself and, most particularly, the absence of stated objectives or goals have resulted in

an insurmountable barrier to fruitful negotiations. Permit us to review the major proposals:

1. Cut maximum sales loads on mutual funds.

2. Require that management fees be reasonable.

3. Prohibit front-end loads.

This outline is deceptively simple, but it is adequate to make the important point that evaluation can only be made relative to well-defined objectives.

SALES LOADS

We would ask the SEC, as proposers of S. 1659, to be specific so that the securities industry and the Congress might weigh the legislation both in terms of stated goals as well as the effectiveness of the bill in obtaining the objectives agreed upon as desirable. For example: Is a reduction in the maximum sales load to be charged by a mutual fund intended to

(a) establish that the sales charge on mutual funds is unfair relative to the service provided; and, based on this assumption, rectify the situation, or (b) reduce sharply profits of those who engage in such sales, regardless of the fairness of the charge, relative to the service performed, or

(c) cut into the underwriter's portion of the sales load, or the portion retained by the broker/dealer and out of which the salesmen receives his compensation; or both, and if so, what proportion, or

(d) slow down the institutionalization trend and its serious effects on liquidity by reducing the sales incentive for merchandising mutual funds, or (e) make mutual funds a more attractive investment vehicle and, in effect, accelerate the trend towards an institutionalized market place, or

(f) channel mutual fund sales away from full-time broker/dealers by making it more attractive for funds to employ salesmen of their own, especially with the related convenient profit potential of an affiliated organization with a stock exchange membership.

We are not implying that the Commission's objectives would fall precisely into any of the above alternatives and wish to underline that the above are only some of the very real potential results of this Bill. We respectfully suggest that neither the industry nor the Congress can pass on the appropriateness of this legislation without complete evalutaion of objectives because the impact is so far-reaching.

The sections of the Bill which are addressed to sales load limitations also propel the SEC into the role of a rate-making body, and nothing less. The Commission would be given the ability to impose a 5 percent ceiling or to grant exceptions from this limitation where it deemed appropriate.

While this rate-making function would be based on the Act of 1940 and designed ostensibly to be a part of the regulatory framework for mutual funds, it has a direct connection with the broker/dealer firms that sell funds to the public.

The technical analysis of the Bill prepared by the SEC the "9.3% sales load most commonly involved in the sale of mutual fund shares" and inadvertently creates the erroneous impression that 9.3% of every dollar invested is the actual sales charge retained by the broker/dealer firm. As a matter of fact, 2%-or approximately 4 of that revenue-goes to the underwriters. In addition, mutual fund sales loads are set up on a graduated scale, wherein the smallest dollar value trades are the only ones that are charged the full 9.3% load. The customer who is able to enter a large mutual fund order is charged a lower load percentage, and on a very large dollar purchase the sales load goes as low as % of 1%.

The result is that the total sales load generated by the merchandisers of mutual fund shares would be substantially below a figure of 9.3% of the aggregate dollars invested.

We have been advised that this volume discount for the large investors has reduced overall revenues from sales loads to approximately 5.7% of the aggregate. Keeping this in mind, we must ask ourselves the following questions re. garding the SEC's proposal for reducing the sales load:

1. It is intended to reduce this 5.7% even further by reducing the 9.3%, or 2. Is it intended to reduce the 9.3% for the purpose of doing away with the volume discount, hoping that by putting the pressure of the lowered percent to the mutual fund industry it might force that industry to charge the same percent on large orders as on small ones in order to retain what it believes to be fair aggregate remuneration?