"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."
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.
The virtual museum and archive is copyrighted by the SEC Historical Society. The Society reserves the right to restrict access to or use of the museum by any user at any time.
Users are prohibited from sharing or downloading any material for publication or commercial purposes without written permission from the Executive Director. Requests for permission must be submitted by email and specify the material requested and for what purpose.
Material used with the Society's permission should be credited to: www.sechistorical.org.