ORGANIZATION OF THE COMMISSION

Mr. GARRETT. To carry out our responsibilities, we have organized ourselves into 30 organization units.

First, we have five major headquarter divisions, with responsibilities for policymaking and execution in our substantive program areas. These divisions in total employ 801 members of our 1975 fiscal year authorized staff of 2144. (A chart relating the organizational units, numbers of people and programs is included as attachment 2 at the end of this statement.)

Next we have 16 technical and staff units which employ 563 or 26 percent of our personnel. These include the normal business functions, such as the Comptroller, the Office of Data Processing, the Office of Personnel. Also included are offices performing highly technical or esoteric functions unique to our own responsibilities: for example, the Office of the Chief Accountant, which plays a major policy-setting role in American financial accounting standards, the Office of Opinions and Review, the adminstrative law judges.

We also have nine regional offices, shown along the bottom of the chart, of varying size from a staff of approximately 235 at our New York regional office to the smallest with a staff of 37 positions in our Boston regional office. We also have regional offices in Atlanta, Chicago, Fort Worth, Denver, Los Angeles, Seattle and Washington, D.C. Most of the regional offices have one or more branch offices.

[The chart follows:]

THE GENERAL MAGNITUDE OF OUR TASKS

Mr. GARRETT. I suspect all of you become a little jaded hearing agency after agency describe the unique importance of its work and of the vital need for additional resources to carry it out. In this respect, we are not unique. We do feel that our work is vitally important, and that events of the recent past have accentuated its importance. Let me speak briefly of two sets of such events; events in the capital markets themselves, and the actions of the Congress.

It is helpful in understanding our basic function and its increased importance to step back and ask the really fundamental question: From a public policy point of view, what do we want our capital markets in general and our securities market in particular to do? I suggest that we want two, conceptually simple but operationally complicated, things.

First, they must provide industry, and to an increasing degree government, the funds required for continued growth. The availability of funds for investment greatly affects the growth in the capacity of American industry, the subsequent growth of real income for our population, our standard of living, and our rate of inflation.

Second, as the other side of the coin, our capital markets must provide individuals with a place to invest their savings, directly or indirectly, with some reasonable expectation of growth in value and yield in thrift institutions.

CORPORATE DEMAND FOR CAPITAL

The capital markets have not been performing either of these roles very well in the recent past, and we are very concerned. American industry's needs for capital in the future are going to be immense. The New York Stock Exchange last fall calculated that expected demand for capital would exceed the likely supply by $650 billion during the next decade. Chase Manhattan Bank in recent newspaper ads, warned of a $1.5 trillion gap. In fact, the dramatic increased need for capital is already occurring. For example, the chart below shows the increase in demand for funds by corporations from 1968 to 1974.

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The annual totals needed, as estimated by Prof. William White at the Harvard Business School, have increased from $96 to $165 billion. Perhaps more important, the funds which must be raised externally, in our capital markets, have risen from $34 to $81 billion.

And what has happened to corporations' ability to raise funds over this same time period? Their ability to raise equity capital through the issuance of stock or long-term debt has decreased substantially. For example, from 1971 to 1973, the mix in the type of funds corporations were able to obtain shifted dramatically.

You will see there were significant decreases in the amounts of equity, that is stock, preferred and common, and long-term debt securities corporations could sell and dramatic increases in the amounts borrowed from banks.

Mr. GARRETT. This change concerns us, of course, because of the effect this shift has, both on the long-term financial strength of corporations, and the inflationary trends in the economy. As corporations go more to banks for funds they compete with individuals for scarce resources, and they may well drive up the interest rate, one of the most important determinants of inflation. If they are doing this because the capital markets are functioning improperly, we feel a major responsibility to play a role in the Government's efforts to understand what is happening and what corrective actions are needed.

And what about individuals: How have the capital markets done in their role of providing a safe repository for their funds? I will not bore you with recitations of the performance of the stock market over the past 5 years. Nor will I run through the operational problems and frauds which, in our view, threaten investor confidence. The one fact I thought I would point out, particularly because of the Congress' recent strong interest in pension reform, is the extent to which the pensions of Americans have increasingly been affected by stock prices.