"1. Have you an on-going committee of marketing and operational senior management to establish overall policy?
2. Have you a written plan for setting rates after May 1, 1975?
3. Have you analyzed your costs by type of order through your system?
4. Have you developed profitability rates for your customers?
5. Have you decided to ‘unbundle' commissions?
6. Do you plan to charge hard dollars for research?
7. Have you decided on what your firm's ultimate role in the securities industry will be?"
- Questions from February 6, 1975 SEC Checklist for Mayday '75
On January 23, 1975, the SEC formally adopted rule 19b-3, ending all fixed commission rates charged to non-member investors, effective on May 1st. SEC Chairman Garrett stated, "For the first time in almost 200 years, the rates of commission that brokers charge to public customers …will not be determined by exchange rules. Market forces will operate to set these prices and there may be variances from firm to firm."(16)
The securities industry lobby had fought hard to keep Congress from passing HR 5050, which mandated the end of the fixed commission system. The industry argued on one hand that Congress should allow the industry to fix the problem; and on the other, that without specific Congressional approval, the SEC should not act administratively on an issue of clear importance to Congress.
Nevertheless, Congress would adopt the legislation mandating the end of fixed commission rates, and the New York Stock Exchange announced within days that it would accept the SEC ruling.(17) The SEC had won an important fight, but in so doing, it had been influenced by increasing pressure from Congress, which began asserting regulatory power over the securities industry in its own right.
The SEC remained in a quandary on what constituted a reasonable rate of return for the securities industry. This issue became even more important as the SEC moved from a model of using disclosure to protect market integrity and investor confidence, to a model that required the SEC to regulate aspects of market organization and operation.
Eugene Rotberg, Chief Counsel of the SEC Office of Policy Planning, demonstrated the difficulty in assessing a rate of return using standard accounting measures. He argued that securities firms were differentiated, some small, others with large numbers of members and much capital. The fixed commission rates which the firms had used to strengthen their bottom line were often inconsistent determinants of the rate of return for the firms.(18)
The SEC's consideration of how to evaluate profit in the securities industry, and what the role of the SEC should be in regulating the rate structure of the industry in order to promote competition while at the same time protecting the profitability of securities firms, would soon create new difficulties for SEC regulation.
(16) 1934 Securities Exchange Act Release No. 11203 (1975)
(17) Robert Cole, "Brokers Ordered to End Fixed Fees," The New York Times, January 23, 1975
(18) May 14, 2007 Eugene Rotberg Oral Histories Interview; Seligman, 480-486
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