3. Is it intended to firmly entrench a philosophy of fees based on the volume discount theory that would benefit larger buyers and sellers—which means the smaller investor would be carrying a higher percent charge for sales service?

4. Is it intended to force the smaller investor (in order to reap the benefits of a large-scale operation) to make his investments through some trust or banking institution that can combine his investment with others to take advantage of the reduced percent of sales loads, thereby increasing the institutionalization trend?

This last point raises the most serious question involved in a consideration of this legislation and, for that matter, almost every current proposal or recommendation for change. The question: How would the adoption of the suggested changes affect the liquidity of markets?

The SEC raises this question in their Mutual Fund Study and I quote: "The growing importance of institutional investors in the stock markets has a significant impact on the securities markets. To the extent that irregular and relatively infrequent transactions in sizeable blocks of securities by large institutional investors became more significant and orders from small investors became less significant, the markets for individual securities became more susceptible to wide and erratic price fluctuations."

In the same section, the report states-"there are increasing strains on the mechanism of the auction market."

In a speech before the IBA on November 29, 1966, a few days before the release of the Mutual Fund Report, Chairman Cohen spoke on the subject of “institutionalization" of the securities markets, which he defined "as the process by which a steadily increasing proportion of stock transactions is accounted for by institutional, rather than individual, investors." By his own estimate, about onehalf of the total public commission income of the New York Stock Exchange members on round-lot transactions is attributable to transactions by institutions. He also stated that institutional transactions "have placed a great strain on, and provided a real challenge for the continuous auction market concept.” And we quote: "Unless we are persuaded that the purpose and functions of the organized exchanges are obsolete, there is an urgent necessity to provide additional depth and liquidity to meet this challenge." Yet the Commission makes no specific recommendations to deal with the recognized problems of increased institutionalization in the legislation and, in fact, as suggested above, these proposals may be compounding the problems that do exist.

Liquidity in an auction market provided by a continuous daily flow of 100to 500-share orders in sufficient quantities to satisfy all normal pressures of supply and demand without leading to erratic price fluctuations. We would have to oppose, therefore, any pricing structure that would contain a volume discount that would make it attractive, in and of itself, for investors to bunch their orders through some institutional vehicle. This would have two undesirable effects:

1. Many smaller and medium-size orders would be removed from the market place, thus reducing existing liquidity.

2. By routing orders through an institutional vehicle, they would become larger and exert extraordinary pressures on the market as clearly delineated by Chairman Cohen.

Most importantly, any spectrum of pricing that provides a discount for larger orders, by its very definition, either directly or indirectly, places a more than proportionate burden of cost on the small individual investor.

MANAGEMENT FEES

The SEC bases its proposals in this area on a generally stated conclusion that the existing provisions of the Act of 1940 and its framework for the disclosure and approval of management contracts, along with the forces of competition. do not afford protection for fundholders against "incurring excessive costs in the acquisition and management of their investments."

Evidently the SEC has reason to believe fundholders have paid excessive costs for management of their investments; yet the SEC has been unable to take remedial action under the present framework; therefore, in their opinion, it must be changed. We feel that Congress should judge this area very carefully on the merits of whether the existing fees are, in fact, excessive before any 1 House Report No. 2337 on Public Policy Implications of Investment Company Growth page 26.

changes are made. We say this because it is obvious that any framework in this area must afford protection for the fund managers against subjective judgment.

FRONT-END LOADS

The Midwest Stock Exchange has consistently maintained a position against the front-end load contractual plans in their present form. We have always felt too large a portion of the sales load is applied against the earlier contributions in the plan. In addition, should the investor, because of a personal hardship, cancel the plan he, in our opinion, pays too great a penalty. The Exchange recognizes certain positive attributes of the plans, however, and would prefer to see restrictions adopted rather than a total prohibition. The Exchange would support a position which would limit the amount of commissions that could be charged annually so the investor would not have a disproportionate share of his investment covering sales fees during the early stages of the contract.

CONCLUSION AND RECOMMENDATION

As you pointed out, Mr. Chairman, when introducing this Bill, these recommendations for legislation prepared by the SEC are the result of studies by the Commission, its Staff and consultants, conducted pursuant to Section 14(b) of the Investment Company Act of 1940. This Section authorized the Commission to make a study and investigation if it finds "any substantial further increase in the size of investment companies creates any problem involving the protection of the investors or the public interest."

Congress, with foresight, provided such direction under Section 14(b), and we wish to emphasize that the Congressional intent clearly revolves around the factor of size and the resultant impact that increased size has on investors or on the public interest. We respectfully ask the Committee to keep this objective of the authorization of the Study in mind and to evaluate whether the legislation completely fulfills Congressional intent.

We wish to make it clear that we are not discussing any portion of the Mutual Fund Report itself, for we know this Committee is not evaluating the report or its recommendations or conclusions. These questions arise entirely from the apparent ramifications of the legislative proposals. However, we must view them in the context of our experience which, in addition to the matters of liquidity and institutionalization, reminds us that our industry last had an increase in its overall schedule of revenues when stock exchange commissions were raised slightly in 1958. Since that time, there have been steadily increasing costs facing the broker/dealer firms while, at the same time, their revenues in other areas have been cut mainly by changes implemented by the SEC.

There has been an alarming number of mergers in the securities industry over the past four years, mainly related to the reduction of profitability. And this has happened at a time when the industry has been operating under a sustained volume of business unlike anything in its history. We are concerned with what might happen if the volume of business were to fall off for any prolonged period. It is only then that we will be fully aware of the potential adverse effects of these and other recent changes. You can see why we are cautious in our revaluations. We are wondering what is going to happen to the capital-raising structure of this nation in the near future.

Mr. Chairman, when you introduced this Bill, you stated it would "enable the Congress to take a fresh look at the laws which regulate our nation's investment companies and to determine whether existing laws adequately serve the present needs of these investors and the national economy." Further, you stated you would seek suggestions and alternate courses of action from the industry.

We recommend that the Congress establish a joint industry-Commission study panel to cover, in depth, the very problems so lightly treated or totally ignored in the present proposal and then report back to the Congress within a specified period of time. We respectfully recommend the task could cover the following major areas:

1. A projection of the capital needs of the U.S. economy over the next 20 years.

2. The amount of this capital that is expected to come from individual investors.

3. The amount of capital that is expected to come from institutions, including mutual funds.

4. A study, in depth, of the future impact of current SEC proposals on our present capital-raising structure as provided by the Investment Banker. 5. An estimate of the present institutionalization trend on future liquidity. 6. A planned course of legislative and rule-making proposals specifically related to these objectives.

7. Further, we ask for some concrete estimate of the actual amount of savings that would filter down to the individual investors from this proposed legislation.

By most any measure, estimated savings would appear to be diminutive relative to the potential overall impact these changes might have on liquidity and the raising of future capital.

Finally, on other occasions, and particularly on the last major legislative change in our industry. there was extended and cooperative discussion between the SEC and the industry before coming to the Congress. This resulted in legislation that was sound and constructive. As we have stated, there is not the slightest meeting of minds on these current proposals which we are convinced stems from the fact that there are insufficient economic data and no stated objectives or goals. We believe that responsibility to the public is not a one-sided coin.

We earnestly propose that you must ask the SEC to accept its share of the responsibility in establishing a proper framework for negotiations. In other words, Mr. Chairman, we suggest you send us back to the negotiation table so that when proposals do come to your Committee you will not merely be in a postion to properly evaluate the legislation, but you will know it contains a complete set of proposals to meet current recognized problems.

Senator PROXMIRE. Our last witness today is the Honorable Frederick Moss, president of the Boston Stock Exchange.

Mr. Moss, I would like to say that a distinguished member of our committee, Senator Brooke of Massachusetts, wanted very much to be here. He has great regard for you. But he is presiding in the Senate right now and had no way of avoiding it. We Senators have to perform.

STATEMENT OF FREDERICK MOSS, PRESIDENT, BOSTON STOCK EXCHANGE

Mr. Moss. I thank the Senator.

Senator MCINTYRE. He has a representative from New England. Senator PROXMIRE. Yes, indeed.

Mr. Moss. Mr. Chairman, members of the committee, I am Frederick Moss, president of the Boston Stock Exchange, a national securities exchange, which has been serving New England investors and the New England financial community for over 133 years. On behalf of the members of the exchange, I wish to express their appreciation to the committee for affording this opportunity to be heard on S. 1659particularly since we firmly believe that the proposals, in their present form, would have serious, immediate and long-range effects on the securities industry and on a large segment of the investing public.

You have heard much and will hear more on the three main proposals contained in the bill before you. The one which has met with vigorous and almost unanimous opposition from all segments of the industry, and which most concerns our members, is the proposal which would arbitrarily set a 5-percent maximum charge on mutual fund sales. Therefore, consistent with the position of the Boston Stock Exchange, my statement today shall be limited to the impact of the sales load proposals on our regional securities industry. I shall be as brief as possible to avoid burdening the record, and consuming too much of this committee's valuable time.

This committee has heard in testimony given and in documents filed in connection with the proposed legislation that the Commission feels

that "Mutual funds fulfill an important public need." Indeed, members of this committee have expressed the view that it is in the public interest to maintain the growth and vitality of the mutual fund industry, and I recall that the Chairman of the Commission generally agreed with this concept in his testimony earlier this week. The securities industry has also welcomed the substantial growth in mutual fund assets and investors over the past 20 years and looks forward to continued growth in the future. And, of course, the mutual fund segment of the industry heartily concurs with these views.

Considering this unanimity of opinion on the positive aspect of mutual funds, is the present proposal to substantially reduce sales charges consistent with the expressed desire to maintain the growth and vitality of the mutual fund industry? This we believe, is a major issue before this committee in its evaluation of this section of the bill.

If the leaders of the securities industry are correct, and they are the ones who sell fund shares, who meet payrolls and who are directly involved in this business on a day-to-day basis, the adoption of this proposal would seriously reduce sales and thereby impair or terminate the growth trend experienced over past years. The Commission seems to feel that reducing the changes may stimulate sales, but on the other hand, it recognizes that it may inhibit sales by removing incentives to sell.

In other words, as clearly as we can understand its position, the Commission is not sure what effect its proposal will have on mutual fund sales. At least one economist who has been intimately involved in studying the industry for the last almost 40 years, Dr. Friend of the Wharton School feels that a 5-percent ceiling would substantially decrease the flow of money into mutual funds.

Why, then, has the proposal been made? Are profits from the sales of funds shares excessive unconscionable, unreasonable? The Commission says that is not in issue-profits are not excessive. No economic studies have been made and none are necessary. The Commission would set a 5-percent ceiling solely on the basis of a comparison with sales charges for other types of securities, although it recognizes and admits that the services and expenses connected with sales of mutual fund shares are not to be equated with sales of other securities. In fact, such differences in changes have always existed and certainly were present when the Investment Company Act of 1940 was adopted.

We do not believe on the basis of the arguments made and material presented that the Commission has justified its proposal arbitrarily to slash sales charges. We do not believe that what is cheaper is necessarily in the public interest, particularly when in reducing charges, incentives to provide a recognized service are lowered to the point where the services are sharply curtailed if not eliminated. The danger of such an approach is manifest, and threatens not only mutual fund sellers but the entire securities industry.

The proposal to reduce sales loads will have two immediate and direct effects: it will reduce gross income to firms and salesmen who sell fund shares; and will, in the opinion of New England dealers, sharply reduce mutual fund sales. We are convinced that the impact on the Boston Stock Exchange and on its members of both a reduction in income and a drop in sales would be adverse and substantially so.

82-865-67-pt. 29

Many of our regional members find that a significant portion of their total securities business consists of sales of mutual fund shares. These firms also participate in underwritings of local utilities, municipal issues, corporate bonds and common stocks. They sell over-the-counter securities as well as those traded on the Boston Stock Exchange and other national securities exchanges. These regional firms compete with large national houses. They compete with banks, insurance companies, and other investment media for the investment dollar.

They remain in business and grow only because they are able to provide the type of personal financial service that appeals to local investors and institutions. Not all are successful in maintaining their individual identities. Some merge, others go into other businesses-but a substantial number of regional firms have been able to continue to provide services to investors and to expand. We find that the success of the regional firms in recent years-their ability to attract salesmen and provide broad investment services-is due in significant part to the availability of mutual fund shares as an investment media at existing sales charge levels.

The impact of the proposals on the exchange itself would be twofold. If our regional firms found their incomes substantially reduced by virtue of statutory rate cuts in one important segment of their business, their desire to remain in the securities business, to risk their capital, their talent and their energy in an unprofitable overregulated industry could be lost. I have heard this sentiment expressed by a number of New England dealers. Many would also fear further arbitrary rate reductions in this and in other areas of their business. If sales charges can be reduced arbitrarily for mutual funds-why not for over-the-counter securities for listed securities? And ultimately why not a ceiling placed on profits from all sources of securities business? These fears are not mine, conjured up for this occasion. They have been expressed to me in one form or another by large and small brokers representing national as well as regional firms. Whether or not their doubts will prove justified, they presently exist as a direct result of the 5 percent sales charge proposal.

Any significant reduction in the number of regional members on the exchange would be a serious blow to the exchange. And particularly so at a time when we are experiencing a period of encouraging growth. Furthermore, what has been said with respect to regional member firms also applies, and possibly to a greater extent, to nonmember firms in our area. Some of these nonmember firms have experienced significant increases in the amount of customer trades in securities listed on our exchange. And while mutual fund sales may still be the mainstay of their business, they are becoming potential candidates for membership on our exchange. Many of these firms would be hard pressed to remain in business if mutual fund sales charges were lowered to 5 percent and their potential growth as broker dealers and exchange members would be cut off.

The second impact on the exchange of the Commission's proposal would be a reduction in the number of securities transactions executed on the exchange. This would be a natural result of decreasing mutual fund sales and a concomitant decrease in mutual fund portfolio transactions. Loss to our members of this source of business would be reflected in decreased activitity on the exchange. While figures are not