While Cohen pushed for changes in the fixed commission rates, the Commission was reluctant to impose rule changes unilaterally on the New York Stock Exchange. But, on the issue of give-ups, which was a device by which an institutional investor dealing in large volume purchases could receive an indirect volume discount, the Commission was more successful. The new emphasis on the economic basis and impact of regulation was central to the SEC concern about give-ups. By 1966, the SEC concluded that the practice of give-ups “has developed to a point where it threatens the integrity of wide segments of the securities industry.”(21)
Initially, Cohen relied on the cooperative approach with the NYSE. He corresponded and cajoled the NYSE to make internal changes. When the NYSE appeared reluctant, the Commission, relying on Eugene Rotberg’s analysis, drafted Rule 10b-10, which would have prohibited give-ups entirely and submitted the rule for public comment.
Cohen implemented an integrated SEC regulatory approach that he believed would be more effective than a series of unpredictable and possibly unrelated court decisions. Despite some initial recalcitrance, as the SEC moved closer toward commission-rate hearings, the NYSE governing board moved toward abolishing give-ups by December 1968.
The SEC analysis of the economic consequences of proposed regulation, and the emergence of an economic theory of regulation, came to fruition in the commission rate hearings during the last year of Cohen’s term. The NYSE and the SEC produced dueling documents over the economic implications of commission rate regulation.
During the SEC hearings, NYSE Vice President Robert Bishop was unable to explain why the rate structure charged varying commissions on stocks of different value, despite the fact that there was no greater work in executing either trade. Furthermore, fixed commission rates unrelated to the economic costs of the trades had resulted in a six-fold increase in brokerage income from 1961-1968.
The rate structure, argued the SEC, shielded NYSE members from the rigors of competition and led to inefficiencies in the market and increased costs to investors. By January 1969, the NYSE acknowledged that their fixed commission rate structure was antiquated and needing reform, and within a year, had begun to reform its commission rates along the lines suggested by the SEC.