In the Midst of Revolution: The SEC, 1973-1981

Dr. Kurt Hohenstein, Curator
Opened December 1, 2009


- November 1, 1974 - "We're Moving Right Along," Herblock, Copyright by The Herb Block Foundation

Introduction

On a balmy New York morning on June 10, 1974, recently-appointed SEC Commissioner A. A. Sommer, Jr., a former member of the NASD Board of Governors and frequent lecturer on securities law, in speaking about the U.S. Securities and Exchange Commission's proposal to end fixed commissions, told the assembled audience at the New York Stock Exchange Marketing Conference that "there is a revolution going on in the securities industry" characterized by unpredictability, out of which some of them may not survive.

Concerned about the state of the securities industry and responding to criticism of what some called heavy-handed SEC regulation, Sommer argued that the agency was also undergoing "radical change, in the course of the revolution."(1) The central issue, he said, was whether the central and historical role of the SEC should be modified to "include a mandate to act in the defense of the securities industry, to shore it up in troubled times." Change, he said, was inevitable, and the question was not whether far-reaching change would occur, "but when, after what upheavals, under whose aegis?"(2)

Sommer, much like the crowd assembled to hear him speak, realized that the securities industry was in the midst of economic change that created enormous upheaval and dislocation. The SEC, responding to those changes in the securities industry, had begun to take a more active role in regulating the structure of the industry. Critics complained that the SEC had gone far beyond its original mandate of regulating the securities industry by promoting full and complete disclosure to ensure the integrity of the markets and protect the interest of the investing public.

The SEC had become involved in issues such as fixed commission rate structure, creation of a central market system, the regulation of insider trading, the expanded regulation and management of accounting practices and standards, and promoting increased access to the exchanges. Sommer's defense of the SEC's actions centered on his belief that the fundamental economics of the securities markets had changed, and consequently, so had the SEC's role. By ensuring greater competition in the markets, Sommer predicted that the SEC would strengthen the industry, protect it from unfair competition, and promote its long-term growth and vitality.

As prescient as Sommer was, his revolution analogy did not go far enough. There was something big going on in the securities industry, especially in its ever-evolving relationship with the SEC as regulator. Yet Sommer could not anticipate that a different revolution was arising, one that by 1981 would place Ronald Reagan in the White House, and usher in a political philosophy calling for a dramatic reduction in government regulatory power that Sommer would have viewed as antithetical to the needs of the industry and the mission of the SEC.

This controversy about the role of the federal government in market regulation would create impediments to the SEC's regulatory authority. From 1973 to 1981, the securities industry and the SEC experienced revolutionary change that created enormous upheaval, provided new economic opportunity and made the task of the SEC to respond to the new demands wrought by the rapid changes in the market increasingly more difficult.

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June 10, 1974
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