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

First Linking Buyers and Sellers

Rule 394 Compromise

"If we permit [Rule 394] to survive in any form, those who have been the sharpest critics of it will undoubtedly charge us with pusillanimity and catering to the ‘establishment' of the securities industry. On the other hand, if we abolish the rule outright, there will be charges that we have sounded the death knell for exchange markets in this country, particularly the New York Stock Exchange."

- October 10, 1975 "Rule 394: Standing on the Threshold" – Address of SEC Commissioner A.A. Sommer, Jr. to the National Security Traders Association

Rule 394, which was renamed Rule 390 in 1977, was a New York Stock Exchange rule which barred an exchange member from executing a trade off the floor through an over-the-counter dealer. The obvious effects of the rule were to create and perpetuate a monopoly for trades in exchange-listed stock, inhibit competition for some stocks, and increase costs for both institutional and individual stock traders.

As early as 1965, SEC staff attorney Eugene Rotberg prepared a study recommending elimination of the rule, which garnered the support of SEC General Counsel Philip Loomis and Trading and Markets Division Director Irving Pollack.(39) As discussion about creating the central market system evolved, it became clear that, as a logical prerequisite to the coordination of the market system, it would be necessary to encourage and promote NYSE members to trade with third-market dealers, and thus would necessitate the repeal of Rule 394.

The SEC took a deliberate approach to forcing change to the rule. At times, the agency appeared to defer to the judgment of organizations in the securities industry. Concern about the effects of the SEC's involvement in efforts to restructure the market system, which some contended went beyond its historical role of regulating the market and promoting financial disclosure, caused the SEC to become cautious, delaying the eventual repeal of Rule 394 and the overall integration of the centralized market for years.

During the Chairmanship of Harold Williams, the SEC acted even more cautiously. The agency demonstrated little faith in its administrative capacity to get the repeal of Rule 394 right, and less faith that the SEC could, with rulemaking and regulation, significantly promote marketplace competition.(40)

This reticence can be explained, to some extent, by the growing competence of Congressional committees to investigate, analyze, and propose solutions to the problems associated with market competition independent of the SEC. For decades, the SEC had been essentially the only credible agency providing that type of analysis and policy recommendation. In the 1970s, Congress became an increasingly important regulatory voice, often competing with SEC regulators. The Congressionally-mandated National Market Advisory Board created another institution with expertise and growing credence as a securities regulatory policy body.

The effect of Chairman Williams' delicate balancing act, occasionally acceding to the expertise of other organizations, was that the SEC evolved from its role as the pre-eminent securities analysis organization to one of a number of competing organizations. While the SEC would continue to lead the charge for regulatory reform, as it had during much of its history, it also had react to criticism and policy suggestions proposed by other organizations. Williams recognized the competing interests, especially with increased Congressional authority, and sought to keep the SEC in control of the debate until it could achieve a resolution of the issues acceptable to the agency.

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Footnotes:

(39) Seligman, 509

(40) Ibid.

Related Museum Resources

Papers

October 1974: SEC Discussion Paper on Some Aspects of the Capital Markets and the Securities Industry, prepaerd for review by The Advisory Committee on the Implementation of a Central Market System
image pdf (Courtesy of the Library of Congress)
November 1, 1974: "The Implementation of the Central Market System," Address by SEC Commissioner Philip A. Loomis, Jr. to the Florida Security Dealers Association
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
March 18, 1975: Statement of the Honorable Ray Garrett, Jr., Chairman, Securities and Exchange Commission, before the Subcommittee on Consumer Protection and Finance of the House Committee on Interstate and Foreign Commerce on H.R. 4457 - Creating a National Market Board
transcript pdf (Courtesy of Harvey L. Pitt)
March 20, 1975: "The Markets: Nationalization or Centralization?" - Address by SEC Chairman Ray Garrett, Jr. to the New York Chamber of Commerce
image pdf (Government Records)
April 24, 1975: Letter from Donald I. Baker, U.S. Department of Justice, to SEC Chairman Ray Garrett, Jr. on the New York Stock Exchange's proposed amendments to Rule 394
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
May 19, 1975: Letter from U.S. Senator Harrison A. Williams, Jr. to SEC Chairman Ray Garrett, Jr. decrying SEC actions on Rule 394
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
May 20, 1975: Reply Letter from SEC Chairman Ray Garrett, Jr. to U.S. Senator Harrison A. Williams, Jr. defending SEC actions on Rule 394
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
May 22, 1975: Letter from SEC Commissioner John R. Evans to U.S. Senator Harrison A. Williams, Jr. defending his comments on Rule 394
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
May 22, 1975: Letter from U.S. Senator Harrison A. Williams, Jr. to SEC Chairman Ray Garrett, Jr. reiterating his concerns on SEC actions on Rule 394
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
July 31, 1975: Letter from John R. McMillan, Reserve Oil and Gas Company, to the SEC on Rule 394
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 1, 1975: Letter from Harry J. Volk, Union Bancorp, to SEC Commissioner John R. Evans on Rule 394
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 8, 1975: Telegram from William T. Ylvisaker, Chairman and CEO, Gould, Inc. to SEC Commissioner John R. Evans to endorse the maintenance of Rule 394 of the New York Stock Exchange
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 14, 1975: Letter from Donald E. Weeden, Weeden & Co., to SEC on Rule 394
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
October 10, 1975: "Rule 394: Standing on the Threshold," Address by SEC Commissioner A. A. Sommer, Jr. to the 42nd Annual Convention of the National Security Traders Association
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 14, 1975: Letter from Karl R. Bendetsen, Champion International to SEC Chairman Roderick M. Hills on Rule 394
image pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
November 21, 1975: Letter from SEC Chairman Roderick M. Hills to Karl R. Bendetsen, Champion International
image pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
September 3, 1976: Letter from William F. Batten, New York Stock Exchange, to Chief Executive Officers seeking comments on proposal for audit committees
image pdf (Roderick Hills Papers, Courtesy of the Gerald R. Ford Library)
September 24, 1976: Letter from the National Market Advisory Board to the U.S. Securities and Exchange Commission re In House Agency Cross Transactions in Listed Securities by Exchange Members
document pdf (Courtesy of George Simon)
December 31, 1976: Report from the National Market Advisory Board to Congress The Possible Need for Modifications of the Scheme of Self Regulation in the Securities Industry so as to Adapt it to a National Market System
document pdf (Courtesy of George Simon)
January 13, 1977: Final Report of the SEC Major Issues Conference
image pdf (Courtesy of Roderick M. Hills)
January 13-15 1977: SEC Major Issues Conference
transcript pdf
January 28, 1977: Letter from the National Market Advisory Board to the U.S. Securities and Exchange Commission re Establishment of a Composite Limit Order Book
document pdf (Courtesy of George Simon)
March 17, 1977: Letter from the National Market Advisory Board to the U.S. Securities and Exchange Commission, with Letter to Edward O'Brien, President, Securities Industry Association
document pdf (Courtesy of George Simon)
May 19, 1977: Letter from the National Market Advisory Board to the U.S. Securities and Exchange Commission re Off-Board Trading by Members of National Securities Exchanges
document pdf (Courtesy of George Simon)
June 16, 1977: Memo from Robert Rewald to Federal Reserve Board of Governors on Rule 390
transcript pdf (Courtesy of the Jimmy Carter Library and Museum)
July 28, 1977: Statement of the Securities and Exchange Commission before the Subcommittee on Oversight and Investigations and the Subcommittee on Consumer Protection and Finance, Committee on Interstate and Foreign Commerce of the House of Representatives, at Joint Over
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
August 24, 1977: Memo from A. Gary Klesch to Lyle Gramley on SEC Rule 390
image pdf (Courtesy of the Jimmy Carter Library and Museum)
September 6, 1977: Letter from the National Market Advisory Board to the U.S. Securities and Exchange Commission re Regulation of Specialists and Market Makers in Light of the Proposed Removal of Off-Board Trading Restrictions
document pdf (Courtesy of George Simon)
September 13, 1977: Letter from Howard Coughlin, Office & Professional Employees International Union to George Meany, AFL-CIO opposing repeal of Rule 390
transcript pdf (Courtesy of the Jimmy Carter Library and Museum)
September 22, 1977: Letter from John Bowles to Charles Schultze on Rule 390
image pdf (Courtesy of the Jimmy Carter Library and Museum)
October 11, 1977: Letter from the National Market Advisory Board to Andrew Klein, Director, SEC's Division of Market Regulation
document pdf (Courtesy of George Simon)
December 1, 1977: "The National Market System in Perspective" - Address by SEC Chairman Harold M. Williams to the Securities Industry Association
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
December 6, 1977: Letter and Report from the National Market Advisory Board to the U.S. Securities and Exchange Commission re Next Steps to be Taken to Facilitate the Establishment of a National Market System
document pdf (Courtesy of George Simon)
June 15, 1978: "The National Market System: A Status Report" - Address by SEC Chairman Harold M. Williams to the FBA/CCH National Market System Conference
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 26, 1978: "Egalitarianism and Market Systems" - Address by SEC Chairman Harold M. Williams, Columbia University/McGraw-Hill Lectures in Business and Society
image pdf (Government Records)
August 7, 1979: Letter from Kenneth Rosenblum, Midwest Stock Exchange, to Andrew Klein, SEC Division of Market Regulation, reporting progress in meeting SEC Act Release 15575 recommendations
image pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
September 13, 1979: Letter from SEC Commissioner John Evans to Senator William Proxmire on the SEC's relationship with the bank regulatory agencies
document pdf (Courtesy of the estate of John Evans)
September 19, 1979: Improvements Needed in the SEC's Efforts to Establish a National Securities Market - Report by the U.S. Comptroller General
image pdf (Courtesy of the Library of Congress)
October 19, 1979: Letter from James Scheuer and Bob Eckhardt, U.S. House of Representatives, to SEC Chairman Harold M. Williams requesting comments following Congressional hearings on the progress towards the development of a national market system
transcript pdf (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)
November 30, 1979: "The National Market System: An Update" - Address by SEC Chairman Harold M. Williams to ALI/ABA Conference on Broker Dealer Regulation
image pdf (Government Records)
1980: U.S. Securities and Exchange Commission Market Oversight Surveillance System
image pdf (Government Records)
October 5, 1980: "The National Market System: An Update" - Address by SEC Chairman Harold M. Williams to National Security Traders Association
image pdf (Government Records)
November 17, 1980: SEC Release: Steps Announced to Reduce Delays in Processing of Registration Statements
document pdf (Courtesy of Richard Rowe)
September 27, 1985: 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
document pdf (permission given by authors May 2003)

Oral Histories

15 October 2002 Andrew Klein With Richard Rowe

edited transcript (pdf)