In October 1971, the SEC began, in a series of hearings, to investigate the deficiencies of the nation’s securities market structure and to develop some alternatives. In February 1972, the Commission released its Statement on the Future Structure of the Securities Markets. 7 This was a foundational document, elaborating on the idea of a “central market” raised earlier, and recognizing that, if securities markets were to be fair and truly open to competition, they would have to be linked. Most desirable would be a nationwide information system and elimination of all artificial barriers between markets. At the very least, the Commission decided, investors deserved transparency of prices on all markets through a “composite quotation system.” 8 But targeted first for change were the fixed commission rates on the NYSE.
In 1970, NYSE President Robert Haack had acknowledged that fixed rates were hurting the Exchange, arguing that “[n]o matter what the standard or criteria used, I believe the securities industry is being led down the path of utility-type regulation when it possesses none of the characteristics of a utility,” 9 and that the new concept of fixed rates, rather than fixed minimums, creates a ceiling on charges. The NYSE Board of Governors did not agree, however, and it won out. In 1971, the SEC’s Institutional Investor Study criticized “noncompetitive, fixed minimum commission rates on securities transactions of institutional size,” 10 but the 1972 Future Structure Statement came out against unfixing all rates—the Commission was worried about unexpected consequences and had no desire to cause dislocation in the financial markets. Instead, Chairman Casey opted for “prudent gradualism,” a stepped approach which started with an April 1971 mandate to unfix commission rates on orders above $500,000 and continued a year later with unfixing of rates on orders above $300,000. Casey’s successor, Brad Cook, halted, but did not reverse, the process.
By then, Congress had taken the initiative. In February 1972, a study by the Senate Securities Subcommittee criticized the SEC for not even considering what a reasonable rate was, and accused it of sitting on its hands as the financial markets underwent a revolution. The study called for unfixing rates within two years for the benefit of the public and the good of the industry. In March 1973 the House Commerce and Finance Subcommittee introduced legislation unfixing commission rates in 1975. The Senate Securities Subcommittee called for unfixing commission rates a year earlier. In the summer of 1973, Brad Cook abruptly resigned, and new SEC Chairman Ray Garrett reinstated the initiative. When the NYSE came to the SEC for a commission rate increase, the Garrett Commission approved—with the caveat that fixed rates would soon end.
Congress continued to work on legislation unfixing commission rates by statute, but some legislators wanted to do much more. Congressman John Moss was intent on abolishing the most egregious “artificial barrier” between exchanges, NYSE Rule 394 which kept members from trading off the exchange. He even hoped to do away with seats on the exchange. Both House and Senate wished to give the SEC authority to oversee the creation of a “National Market System.” In 1973 and 1974, the Senate passed four bills while the House worked on its version, which died in 1974. While Congress drafted, Garrett acted—in early 1975, SEC Rule 19b-3 ended fixed commission rates as of May 1, 1975.
Rule 394 remained a matter of contention. When the House and Senate again took up legislation in 1975, the former favored immediate abolition while the latter wished to give the SEC authority to study the matter and then decide what to do. The Senate won that debate and also dismissed the idea of abolishing seats on the exchange. Congress passed the bill on May 22 and it was signed into law on June 4.
The Securities Acts Amendments of 1975 put the congressional stamp on the unfixing of commission rates that the SEC had already accomplished. Although it took no action on Rule 394, the legislation was most important for its broader mandate: it obligated the SEC to “facilitate the establishment of a national market system for securities.” The stated objectives being: 1) economically efficient execution, 2) fair competition, 3) collection and dissemination of market information, 4) execution in the best market, and 5) the opportunity to execute orders without a dealer. 11 Congress understood that the exchanges and markets themselves would have to accomplish much of this—but gave the SEC, in consultation with a National Market Advisory Board established by the legislation, responsibility for ensuring that it happened. The implications were profound, shifting the SEC from merely being a regulator of existing markets to having responsibility for structuring a new, national, one. No one knew what it would look like.
(7) Courtesy of Hathitrust. The digital images and OCR of this work were produced by Google, Inc.
(8) The National Market System: A Selective Outline of Significant Events, 1971-1985, by Robert L.D. Colby, Lloyd H. Feller, Mark D. Fitterman and George T. Simon, September 27, 1985.
(9) Robert W. Haack, Competition and the Future of the New York Stock Exchange, November 17, 1970.
(10) Seligman, The Transformation of Wall Street, 475.
(11) "The National Market System: An Update" - Address by SEC Chairman Harold M. Williams to National Security Traders Association, October 5, 1980, 6.
(Courtesy of Kathryn McGrath)
Daniel Goelzer served on the staff of the SEC from the mid-70’s through 1990. He began his SEC career in 1974 as a staff attorney in the Office of the General Counsel, and rose through the ranks to become the Commission’s General Counsel from 1983 to 1990. He also worked in the Office of the Chairman and was Executive Assistant to both Chairman Harold Williams and Chairman John Shad. After leaving the SEC, he was partner at the law firm of Baker & McKenzie LLP in Washington, DC until his appointment as a founding Board member of the Public Company Accounting Oversight Board (PCAOB) in 2002. He served as PCAOB’s Acting Chairman from 2009 – 2011 and returned to Baker & McKenzie after his PCAOB term ended in 2012. He was one of the founding Trustees of the SEC Historical Society.
From 1968 to 1978, Harvey Pitt served on the staff of the SEC, eventually becoming the agency's youngest-ever General Counsel in 1975 at age 30. From 2001 - 2003 he was the 26th SEC Chairman. For nearly 25 years prior to serving as SEC Chairman, Mr. Pitt was a partner in the law firm, Fried, Frank LLP. After he left the SEC, he founded the strategic consulting firm, Kalorama Partners, LLC. He was a founding trustee and first President of the SEC Historical Society.
