BROKERAGE COMMISSIONS AND RESEARCHAFTER MAY DAY'

REMARKS OFPHILIP A. LOOMIS~ JR.

COMMISSIONERSECURITIES AND EXCHANGE COMMISSION

1975 ANNUAL CONFERENCETHE FINANCIAL ANALYSTS FEDERATIONCHICAGO~ ILLINOISJUNE 3~ 1975

FOR SEVERAL MONTHS NOW THE SECURITIES INDUSTRYHAS BEEN LOOKING FORWARD WITH VERY MIXED EMOTIONS TOTHE DAWN OF MAy DAY AND COMPETITIVE RATES. Now MAy DAYrlAS COME AND GONE BUT THE CONSEQUENCES ARE STILL NOTENTIRELY CLEAR. NUMEROUS CROSS CURRENTS SEEM TO HAVEBEEN AT WORK. FROM THE VIEWPOINT OF THE INDIVIDUALINVESTOR NOTHING EXTRAORDINARY SEEMS TO HAVE OCCURRED~BUT WHAT DID OCCUR LOOKS PRETTY PROMISING. THEGENERAL LEVEL OF RATES DID NOT MOVE MUCH BUT A GOOD MANYFIRMS UNVEILED NEW PLANS DESIGNED TO ATTRACT DESIRABLECUSTOMERS~ OFFERING PORTFOLIO ANALYSIS~ INTEREST ONCREDIT BALANCESJ DISCOUNTS TO REPEAT CUSTOMERSJ ANDVARIOUS OTHER SERVICES. FIRMS~ IN OTHER WORDS~ HAVEAVAILED THEMSELVES OF THE OPPORTUNITY TO COMPETEFOR THE BUSINESS OF fHE KIND OF INDIVIDUAL CUSTOMERSTHEY WANT. THIS SEEMS ALL TO THE GOOD.

THE INSTITUTIONAL PICTURE IS MORE CLOUDED. ALLI CAN TELL YOU IS WHAT I HAVE BEEN TOLDJ SINCE I WASNOT DOWN IN THE FRONT LINES. BUT IT SEEMS JUST AS

THE SECURITIES AND EXCHANGE CO~~ISSION~ AS A MATTER OFPOLICY~ DISCLAIMS RESPONSIBILITY FOR ANY PRIVATEPUBLICATION OR SPEECH BY ANY OF ITS MEMBERS OREMPLOYEES. THE VIEWS EXPRESSED HERE ARE MY OWN ANDDO NOT NECESSARILY REFLECT THE VIEWS OF THECOMMISSION OR OF MY FELLOW COMMISSIONERS.

-2-WELL TO GIVE YOU MY IMPRESSIONS IF ONLY TO GIVE YOUAN OPPORTUNITY TO CORRECT THEM. OUR SO-CALLEDMONITORING SYSTEM IS IN FULL OPERATION BUT IT IS TOOEARLY TO GET ANY MEANINGFUL RETURNS FROM IT. SOME LAGIS INEVITABLE IF WE ARE TO AVOID BURDENING FIRMS WITHREPORTS TO US ALMOST ON A DAY-TO-DAY BASIS. INTHAT CONNECTIONI II AND MY COLLEAGUES AS WELLI WOULDWELCOME ANY INFORMATION WE CAN GET AS TO WHAT ISGOING ON WITH RESPECT TO COMMISSIONS. MUCH OF OURINFORMATION IS SECOND HAND AND MAY BE WRONG. WEWELCOME RELIABLE FIRST HAND INFORMATION FROM ANYONEWHO WANTS TO CALL US. WITH THOSE APOLOGIES~ HEREARE MY IMPRESSIONS.

A GOOD MANY PEOPLE THOUGHT THAT MAy DAY WOULDBE A NON-EVENT AND FOR THE FIRST COUPLE OF DAYS ITLOOKED RATHER THAT WAY. SEVERAL MAJOR FIRMS HADANNOUNCED WHAT THEIR GENERAL LEVEL OF CHANGES WOULDBEl AND MOST FIRMS ADHERED TO THESE. BUT SOME DIDNOTI PARTICULARLY DURING THE FIRST FULL WEEK OFUNFIXED RATES. I HAVE THE IMPRESSION THAT A FEWPERFECTLY RESPECTABLE FIRMS WHICHi HOWEVERI HAD NOTPREVIOUSLY BEEN A SIGNIFICANT FACTOR IN THE INSTITUTIONALMARKETI DECIDED TO TRY TO ENLARGE THEIR MARKET SHAREBY OFFERING DEEP DISCOUNTS. THEY GOT A GOOD DEALMORE INSTITUTIONAL BUSINESS THAN THEY HAD BEEN

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ACCUSTJMED TO~ PARTICULARLY SO LONG AS THE MAJORFIRMS HELD THE LINE. AT FIRST THESE DEEP DISCOUNTS WERE~RGELY CONFINED TO THE SMALLER INSTITUTIONAL ORDERS OFTHE TYPE WHICH ARE SOMETIMES RATHER DISDAINFULLY REFERREDTO AS THE "NO-BRAI~ERS." INSTITUTIONS NO LONGER PASSEDTHESE OUT CASUALLY~ OR IN RESPONSE TO THE PREFERENCES OFTHEIR CLJENTS. LATER THIS DTSCOUNTING SPREAD TO LARGEORDERS~ ALTHOUGH NOT TO BLOCKS OF A SIZE CALLING FORPOSITION!NG. LARGER INSTITUTIONAL FIRMS AND SOME WIREHOUSES DISCOVERED THAT THEIR MARKET SHARE SEEMED TO BEDECL.INING. THEY WERE NO LONGER GETTING CALLS FROM THEIRREGULAR INSTITUTIONAL CUSTOMERS. AT ABOUT THIS POINT~ THEMAJOR INSTITUTIONAL FIRMS CONCLUDED TO LOWER THE UMBRELLAOR PI.::RHAPSONE MIGHT SAY" TO LOWER THE BOOM~ AND THISAPPROXIMATELY IS WhtRE w:: ARE NOW.

W£ ARE TOLD THAT THE INITIATIVE FOR THISDISCOUNTI~G CAME NOT FROM INSTITUTIONAL PRESSURES~BUT RATHER FROM SOME FIRMS IN THE I~DUSTRY WHICH USEDTHIS DEVICE TO INCREASE THEIR INSTITUTIONAL SHARE.THE INSTITUTIONS UNDERSTANDABLY ACCEPTED THE DISCOUNTSWHICH WEr.E OFFERED THEM AND MAY HAVE COME TO THECONCLUSION THAT THESE REPRESENTED TH' ING RATE.WE ARE ALSO TOLD THAT A GOOD MANY INSTITUTIONS HAD

-4-PRE-PAID THEIR RESEARCH COr~ITMENTS BEFORE MAy DAYIN ORDER TO CLEAR THE DECKS FOR WHATEVER HAPPENEDTHEREAFTER. WHETHER THIS IS SO OR NOT I DO NOTKNOW.

SO WHAT CONCLUSIONS CAN WE DRAW FROM THIS. ITDID NOT SURPRISE ME VERY MUCH TO HEAR OF FAIRLY DEEPDISCOUNTS ON SMALL IN~TITUTIONAL ORDERS. WHEN THENEW YORK STOCK EXCHANGE ESTABLISHED THE RATE FORTHIS KIND OF CqDER SOME YEARS AGO~ THE STUDIES ONWHICH THESE RATES WERE BASED INCLUDED A FAIRLYGENEROUS ALLOWANCE FOR THE COMPENSATION OF SALESMENWHO WERE EXPECTED TO GENERATE SUCH ORDERS. ORDERSOF TH:~ SIZE FROM INSTITUT10NS~ HOWEVER~ ARE USUALLYGENERATED BY THE INSTITUTIONS THEMSELVES OR BY THEIRCLIENTS~ AND THUS A RATE DESIGNED TO COMPENSATE THESALESMAN WHO GENERATED THE ORDER AFFORDED ROOM FORDISCOUNTS ON ORDERS NOT SO GENERATED. IT IS.HOWEVER1 RATHER MORE TROUBLESOMe TO SEE SUCH DISCOUNTSSPREADING TO LARGER ORDERS WHICH REQUIRE MORE EXECUTIONCAPACITY. THIS MIGHT MERELY REPRESENT THE NORMALWORKINGS 0: COMPETITION IF THE FIRMS OFFERING SUCHDISCOUNTS ARE COVERING THEIR COSTS. THE DISTURBINGQUESTION IS WHETHER THESE FIRMS REALLY KNOW WHATTHEIR COSTS ARE. UNDER FIXED RATES1 THIS WAS NOT

SO NECESSARY. FIRMS COULD CHARGE THE FIXED RATE ONWHAT BUSINESS THEY COULD OBTAIN AND HOPE FOR THE BESTAND A GOOD MANY LESS WELL MANAGED SECURITIES FIRMS SEEMTO HAVE DONE JUST ABOUT THAT. BUT ONCE A F1RM GETSINTO THE BUSINESS OF FIXING ITS OWN RATES~ IT HAS TOKNOW WHAT ITS COSTS ARE.

BEYOND THIS~ IT IS CLEARLY TOO EARLY TO DRAWANY CONCLUSIONS. AFTER ALL NEITHER THE SECURITIESINDUSTRY NOR ITS INSTITUTIONAL CUSTOMERS HAVE EVERHAD ANY EXPERIENCE WITH PRICE COMPETITION IN THECOMMISSION ~REA. THEREFORE THE INDUSTRY IS FEELINGITS WAY AND IT WOULD HARDLY BE SURPRISING IF SOME FIRMSADOPTED A MISTAKEN STRATEGY. ON THEIR SIDE THEI~STITUTIONS DID NOT KNOW WPAT TO EXPECT AND IFSOMEONE OFFERED THEM WHAT LOOKED LIKE A BARGAIN~IT WAS ONLY NATURAL FOR THEM TO ACCE~T IT. WE HAVEHEARD~ HOWEVER~ THAT SOMETHING ELSE MAY BE HAPPENINGWHICH IS NOT SO UNDERSTANDABLE. WE ARE TOLD THATSOME INSTITUTIONAL TRADERS ARE BEING ALLOWED TO VIEWITH EACh OTHER IN SEEKING BARGAINS ON COMMISSIONS~WITHOUT BEING GUIDED BY ANY GENERAL POLICY ON THEPART OF THE INSTITUTION ~S TO WHAT SERVICES IT WANTSTO GET FOR ITS COMMISSIONS AND WHAT IT IS WILLING TOPAY FOR THEM~ AND PERHAPS EVEN WITHOUT TOO MUCH

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ATTENTION TO BEST EXECUTION. AGAIN I DO NOT KNOWWHETHER THIS IS TRUE OR NOT~ BUT IF IT IS~ THEINSTITUTIONS 1NVOLVED WOULD SEEM TO BE MAKING ASERIOUS MISTAKE.

WE EXPECT THAT THINGS WILL SETTLE DOWN~ ONCE THEFIRMS AND THE INSTITUTIONS HAVE BOTH HAD MOREEXPERIENCE~ WHEN THE INITIAL PROBING AND EXPERIMENTINGARE OVER~ AND WHEN EACH HAS A BETTER IDEA OF WHAT ITCAN AND CANNOT DO AND WHAT IT CAN AND CANNOT EXPECTFROM THE OTHER SIDE OF THE BARGAIN. SOMETHING OF THESORT HAPPENED WHEN WE FIRST INTRODUCED COMPETITIVERATES AT LEVELS ABOVE $500~OOO AND THEN ABOVE $300~OOO.INITIALLY RATES IN THESE BRACKETS DROPPED VERY SHARPLY.LATER THEY RECOVERED CONSIDERABLY. OF COURSE THEANALOGY IS NOT PERFECT~ BECAUSE UNDER THOSE ARRANGE-MENTS THE FIRMS HAD A SUBSTANTIAL CUSHION PROVIDED BYTRANSACTIONS UNDER THE BREAK POINT. BUT~ IF ANYTHING~THAT SHOULD LEAD TO MORE CARfFUL NEGOTIATION NOW.

THERE IS ANOTHER INDICATION OF A TRANSITIONALAND PERnAPS TEMPORARY SITUATION. THE THIRD MARKETWAS QUITE ACTIVE IN MAy. THIS WAS NOT EXPECTED SINCETHE GENERAL ANTICIPATION WAS THAT THE THIRD MARKETWOULD HAVE ROUGH GOING UNDER COMPETITIVE RATES. THE

-7-AUTHORIZED VERSION WAS THAT THE THIRD MARKETSURVIVED UNDER THE FORMER SYSTEMJ DESPITE CERTAINHARDSHIPS SUCH AS RELATIVE ISOLATION FROM AGOOD DEAL OF THE ORDER FLOW WHICH IS SO IMPORTANTTO A MARKET MAKER; BECAUSE IT WAS ABLE TO UNDERCUTTHE FIXED COMMISSION. THE NEW YORK STOCK EXCHANGEJIN ITS MORE UNCHARITABLE MOMENTSJ REFERRED TOTHE THIRD MARKET AS A "PARASITE." THE EXPLANATIONWE HEAR FOR THE THIRD MARKET ACTIVITY IN MAy WASTHAT INSTITUTIONAL TRADERS WERE SO FRUSTRATEDTRYING TO FIGURE OUT WHAT COMMISSIONS THEY SHOULDPAY THAT THEY AVOIDED THE WHOLE PROBLEM BY DEALINGNET IN THE THIRD MARKET WHERE NO ONE COULD SECONDGUESS THEIR DECISIONS ON COMMISSIONS. THIS KINDOF SITUATION CAN HARDLY PERSIST AFTER PEOPLEGET THEIR BEARINGS.

THE COMMISSION WILL WATCH THE SITUATIONCAREFULLY AND THERE ARf CERTAIN STEPS WE CAN TAKETO DEAL WITH SUCH PROBLEMS ON DISCRIMINATORY PRICING.I WOULD_NOTJ HOWEVER~ HOLD OUT TOO MUCH HOPE THAT WEWILL RE-INTRODUCE FIXED RATES UNLESS SOMETHINGREALLY UNEXPECTED HAPPENS. THE NEWLEGISLATION WOULD ALLOW US TO DO THAT UNTIL

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NOVEMBER l~ 1976~IF WE DECIDE~ AFTER AN ADMINISTRATIVEHEARING~ THAT THIS WOULD PE IN THE PUBLIC INTEREST.BUT UNDER NO CIRCUMSTANCES COULD FIXED RATES BEPERMITTED TO CONTINUE AFTER NOVEMBER l~ 1976~UNLESS THECOMNISSION FINDS~ AFTER A FULL DRESS ADVERSARYHEARING WITH CROSS EXAMINATION OF WITNESSES~BOTH THAT THE NEW RATES ARE REASONABLE IN RELATIONTO COSTS IN ACCORDANCE WITH PUBLISHED STANDARDSAND THAT THE ACTION DOES NOT UNNECESSARILY B~RDENCOMPETITiON AFTER CONSIDERING ALL AVAILABLEALTERNATIVES. IT WOULD BE DIFFICULT EITHER TOMAKE SUCH FINDINGS OR TO SUSTAIN THEM IN COURT.WE WOULD~ THEREFuRE~ BE RELUCTANT TO CREATE NEWUNCERTAINTIES AND TO REQUIRE THE INDUSTRY TO GOTHROUGH MAy DAY ALL OVER AGAIN.

SO MUCH FOR THE MERRY MON1H OF MAy. BEHINDTHE ~~ RMOIL~ HOWEVER~ ARE SOME MORE

/FUNDAMENTAL QUESTIONS. THE COMMISSION RATE~ALTHOUGH NOMINA~L'. SIMPLY A CHARGE FOR EXECUTINGAN ORDER~ HAS TRADITIONALLY PAID FOR A GREAT MANYOTHER SERVICES SOME O~ WHICH ARE ONLY VAGUELYRELATED TO AN EXECUTION. THESE INCLUDE CUSTODYOF CUSTOMER'S SECURITIES~ ACCOUNTING FOR DIVIDENDS~FORWARDING ANNUAL REPORTS~ PRICING MUTUAL FUND

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PORTFOLIOS~ AND SO FORTH. PARTICULJ~RLY THEY HAVEINCLUDED RESEARCHJ WHICH IS YOUR BUSINESS. THISCOMBINATION PROBABLY ORIGINATED WITH THE FACT ThATSECURITIES SALESMEN GENERATED COMMISSION BU~INESSBY PERSUADING A PROSPECTIVE CUSTOMER THAT XYZ WAS AGOOD BUYJ AND THIS SALESMANSHIP WAS SOMETIMESDENOMINAT~D AS RESEARCH.

FOR OPENERS ONE MIGHT ASK~ WHAT IS SECURIT!ESrtESEARCH AND WHAT IS IT WORTh? THE TERM "RESEARCH"SOMEHOW ~ONJURES UP AN IMAGE OF WHITE COATED SCIENTISTSIN THEIR LABORATORIES LABOROUSLY MEASURING MOLECULESIN THE SINGI.E MINDE~ SEARCH FOR TRUTH. OBVIOUSLYTHAT IS NOT QUITE WHAT YOU DO. NEVERTHELESSSECURITIES RESEARCH IS AT THE HEART 01' THE INVESTMENTPROCESS) BOTH fOR THE PARTICULAR INVESTOR AND FOR THEECONOMY AS A WHOLE. SECURITIES ARE INTANGIBLESEXISTING ONLY ON PAPER AND IN CONTEMPLATION OF LAWJ

REPRESENTING EITHER A PROMISE OR A BUNDLE OF RIGHTSAND CLA I,.,SWHOSE VALUE DEPENDS ON WHAT HAPPENS IN THEFUTURE. SOME SECURITIES ARE VERY VALUABLEJ SOME AREDOUBTFULJ IF NOT WHOLLY SPURIOUSJ AND MOST ..<ESOMEWHERE IN BETWEEN. You CANNOT TELL WHICH IS WHICHSIMPLY BY INSPECTING THE CERTIFICATES. BOTH THE DECISIONOF A PARTICULAR INVESTOR TO BUYJ SELL OR 'HOLD AND THEALLOCATION OF CAPITAL WITHIN THE ECONOMY DEPEND UPONINFORMED JUDGMENTS AMONG A BEWILDERING VARIETY OF

-10-ALTERNATIVES. THE SECURITIES ACT OF J.933 AND INLARGE MEASURE THE SECURITIES EXCHANGE ACT OF 1934WERE DESIGNED TO PERMIT THESE INFORMED JUDGMENTSBY MANDATING DISCLOSURE WITH RESPECT TO SECURITIES.A VAST MASS OF INFORMATION IS THUS PRESENTED BUTFINANCIAL ANALYSTS SAY THAT IT IS NOT ENOUGH ANDDILIGENTLY SEARCH FOR MORE. YET FROM ALL THISTHERE SELDOM EMERGES A CLEAR CONSENSUS AS TO THERELATIVE VALUE OF DIFFERENT SECURITIES AND WHICHSHOULD BE BOUGHT AND WHICH SHOULD BE SOLD. THISIS TROUBLESOME TO YOU AND TO OTHERSJ BUT IT ISCLEARL, A GOOD THING. IF EVERYBODY AGREED AS TOWHAT TO SELL AND WHAT TO BUY AND ACTED ON THESEJUDGMENTSJ THAT ACTION WOULD CERTAINLY MAKE THEMALL WRONG. IN THE SECURITIES MARKETS TRUTH ISRELATIVE.

CONFRONTED WITH THESE PARADOXES SOME PEOPLESIMPLY GIVE UP AND CONCLUDE THAT SECURITIESRESEARCH IS BY NATURE USELESS. THUS A RECENTLEARNED ARTICLE ON COMPETITION AND REGULATION INTHE SECURITIES MARKETS DISMISSES THE PROBLEM OFPAYING FOR RESEARCH UNDER COMPETITIVE RATES BYSUGGESTING THATJ IN VIEW OF THE "RANDOM WALK"THEORYJ MUCH SECijRITIES RESEARCH "IS WORTHLESS."

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As A GENERAL PROPOSITION THIS CANNOT BE TRUE SINCEACCURATE INFORMATION IS ESSENTIAL TO INVESTING. THERANDOM WALK THEORY; AS A VERSION OF THE THEORY OFEFFICIENT MARKETS1 RESTS ON A VERY DIFFERENT CONCLUSION.THIS ESSENTIALLY IS THAT THERE IS SO MUCH INFORMATIONAVAIL4BLE IN THE MARKETS ABOUT ALL SECURITIES THAT A

PARTIr:ULAR SECURIT'r H-ICH--ISTRULY UNDERVALUED BY THE -THAT THEORY DOES1 HOWEVERI

S ~ TO SUPPORT THE VIEW THAT PURPORTED SECURITIES~ESEARCH WHICH MERELY REPEATS W~T HAS ALREADY

\ BEEN MADE KNOWN AND ACTED UPON IS NO~T~ ~~RY-,MUCH. --------- ------------ ---- - -------------

ONE IS THUS LED TO OBSERVE THAT SECURITIESRESEARCH COMPRISES A VAST AMOUNT OF DATA WHICH ISANALYZED BY A GREAT MANY PEOPLE IN A GREAT MANYDIFFERENT WAYS AND IN A VAST VARIETY OF COMBINATIONSRESULTING IN A GREAT MANY D!FFERENT CONCLUSIONS.EACH ANALYTICAL SCHOOL PLACES EMPHASIS ON DIFFERENTFACTORS RANGING FROM THE STATE OF THE ECONOMYI TOTHE METICULOUS ANALYSIS OF A PARTICULAR COMPANY I TOTHE MYSTERIES OF CHARTING, MOST OF US AGREE THATTHE PROCESS1 WHEN CAREFULY AND HONESTLY DONEI ISVALUABLE BUT IT IS EXCEEDINGLY DIFFICULT TO PLACEAN AGREED VALUATION ON ANY PARTICULAR PIECE OF IT.

//

-u-SOME OF IT MIGHT BE~ AND WAS~ CHARACTERIZED ASGARBAGE.

COMPETITION BETWEEN SECURITIES FIRMS FORINSTITUTIONAL BUSINESS UNDER FIXED RATES WAS A PROCESSWHICH SEE~ED TO DEFY ECONOMIC ANALYSIS. Two VERYDIFFERENT SERVICESJ EXECUTION AND RESEARCH~ WERE PAID FORBY LUMP SUM COMMISSIONS FIXED BY THE NEW YORK STOCK EXCHANGELARGELY UPON THE BASIS OF HISTORY ADJUSTED FOR INFLATION.BOTH SeRVICES ARE VALUABLE BUT ALMOST IMPOSSIBLE TO VALUE.THUSJ ON THE EXECUTION SIDE~ SOME ORDERS COULD BE EXECUTEDALMOST AUTOMATICALLY. You SIMPLY WALKED ACROSS THE FLOORAND HANDED THEM TO THE SPECIALIST. OTHERS REQUIREDBROKERAGE SKILL~ SOMETIMES DEFINED AS A FEEL FOR THEMARKET OR AS AN ABILITY TO FIND THE OTHER SIDE. THERESEARCH SIDE PRESENTED THE PROBLEMS I HAVE ALLUDED TO.IT IS~ THEREFORE~ NOT SURPRISING THAT ECONOMISTS~ WHENCONFRONTED WITH THIS DUAL PROCESS~ THREW UP THEIR HANDSIN HORROR AND ALMOST UNANIMOUSLY RECOMMENDED THAT IT BEABOLISHED. THAT IT GAVE RISE TO ABUSES AND INEFFICIENCIESSEEMS~ AT LEAST TO ME~ CLEAR. THESE ARE DOCUMENTED INTHE CO~~ISSION'S RELEASE OF JANUARY 231 1975 ANNOUNCINGRULE 19B-3 ELIMINATING FIXED COMMISSION RATES ON PUBLICORDERS AND IN THE HEARINGS WHICH PRECEDED THAT ACTION.

-13-As POINTED OUT IN THAT RELEASE~ BY THE END

OF 1974 FEW PEOPLE DEFENDED FIXED RATES ANYMOREEXCEPT UPON THE GROUND THAT ANY ALTERNATIVE WOULDBE WORSE. THOSE WHO FELT THAT WAY THEN ARE PROBABLYNOW INCLINED TO SAY "I TOLD YOU SO." BUT I THINKIT IS NOT YET TIME TO GIVE UP ON COMPETITION EVENIN THIS VERY PECULIAR MARKET. AFTER ALL IT TOOK USYEARS TO GIVE UP ON FIXED RATES FOR COMBINED ANDUNDEFINED SERVICES~ ALTHOUGH THE DEFECTS OF THATPROCESS HAVE BEEN FAIRLY OBVIOUS FOR ABOUT A DECADE.

WE KNOW THAT MANY TYPES OF RESEARCH AREESSENTIAL AND WILL CONTINUE TO BE REQUIRED NOT ONLYBY INDIVIDUALS BUT ALSO BY INSTITUTIONS. NOTWITHSTANDINGTHE EXPERIENCE OF THE PAST MONTHJ WE SHOULD ALSO KNOWT~AT INSTITUTIONAL RESEARCH IS NOT WHAT ECONOMISTSCALL A "FREE GOOD." IN OTHER WORDS THERE IS NO SUCHTHING AS A FREE LUNCH. I THINK MOST OF US CAN SEEWHERE WE WOULD LI KE TO GO~ BASED UPON A FEW SIt1PLEPRINCIPLES WHICH INCLUDE THE FOLLOWING. FIRSTJ NOINSTITUTION CAN OBTAIN ALL THE RESEARCH IT NEEDSIN HOUSE~ AND THE SMALLER INSTITUTIONS CAN~OT EVENTRY TO. SECONDJ GIVEN THE CHARACTERISTICS OF RESEARCHIT MUST COME FROM A NUMBER OF SOURCES. No ONE HASA MONOPOLY OF GOOD IDEASJ AND THE MARKETS CANNOT WORK

THAT IT COME FROM MANY INDEPENDENT SOURCES} AND THAT

-14-PROPERLY UNLESS A WIDE VARIETY OF OPINION} INCLUDINGMUCH OPINION WHICH TURNS OUT TO BE WRONG} IS REPRESENTED.

ITHIRD} EVEN GIVEN THE FOREGOING} THE RESEARCH PROCESS},LIKE OTHER PROCESSES} CAN BENE~IT FROM SOME TYPE OFECONOMIC DISCIPLINE. IF NO ONE WANTS A PRODUCT ENOUGHTO PAY FOR IT} THE PRESUMPTION IS THAT THIS PRODUCTMAY NOT BE WORT~fHESE PRINCIPLES LEAD TO--------------

//'! THE CONCLUSION THAT RESEARCH SHOULD BE WIDELY AVAILABLE};

AND TO NOT BUY WHAT THEY DON'T WANT.THE PROBLEM IS HOW TO GET FROM HERE TO THERE.

THE NEEDED RESEARCH MUST COME FROM THE STREET} SINCE}....: --------------AT LEAST AT PRESENT} THERE IS NO OTHER PLACE FOR IT TO

---_._--- --- ----_._--_._---_._----------COME FROM. IT SEEMS THAT FOR THE TIME BEING IT WILL

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HAVE TO BE PAID FOR BY COMMISSIONS SINCE MECHANISMS AND_._------PROCEDURES FOR PAYING FOR IT SEPARATELY SIMPLY DO NOT

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NOW EXIST. THE NEW LEGISLATION RECOGNIZES THIS FACT.I SHOULD NOTE} HOWEVER} THAT THERE IS ONE DOOR WHICHTHE NEW LEGISLATION PRETTY WELL CLOSES AND THAT IS THEGIVE-UP. ON THAT SUBJECT THE UNANIMOUS CONFERENCEREPORT WENT OUT OF ITS WAY TO USE SOME PRETTY EMPHATICLANGUAGE AS FOLLOWS:

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-15-"THE CONFEREES ANALYZED THE POSSIBILITYTHAT THE FIDUCIARY PROVISION WOULD BEASSERTED AS A SHIELD BEHIND WH~CH;THEGIVE-UPS AND RECIPROCAL PRACT1CES WHICHWERE SO NOTORIOUS DURING THE LATE 19bO'sCOULD BE REINSTITUTED. THE CONFEREESBELIEVE THE NEW LANGUAGE WOULD NOTPERMIT SUCH A RESULT. IHE PROVISIONAGREED TO PROVIDE THAT A MONEY MANAGERMAY PAY A BROKER OR DEALER AN AMOUNTOF COMMISSION~ FOR IHAI BROKER ORDEALER'S EXECUTING A TRANSACTION} IF THEMONEY MANAGER DETERMINES THAT THESERVICES IT RECEIVES FROM ItlAI BROKEROR DEALER JUSTIFY THE PAYMENT. IHEPROVISIONS HAVE NO APPLICATION WHATSOEVERTO A SITUATION IN WHICH PAYMENT IS MADE BYA MONEY MANAGER TO ONE BROKER OR DEALERFOR SERVICES RENDERED BY ANOTHER BROKEROR DEALER. THE GIVE-UP WAS A REGRETTABLECHAPTER IN THE HISTORY OF THE SECURITIESINDUSTRY AND THE LIMITED DEFINITION OFFIDUCIARY RESPONSIBILITY ADDED TO THELAW BY THIS BILL WILL IN NO WAY PERMIT!TS RETURN."THE ULTIMATE STRUCTURE CANNOT NOW BE FORESEEN.

THERE ARE GOOD ARGUMENTS~ PARTICULARLY IN ECONQ~ICTHEORY~ THAT RESEARCH SHOULD BE MARKETED FOR A

---SEPARATE CHARGE. I AM~ FRANKLY~ INCLINED TO PREFERTHAT AS THE ULTIMATE OUTCOME. BUT I WOULD NOTPROPOSED TO DICTATE THIS RESULT. IF THE INDUSTRYEVOLVES.DIFFERENTLY~ SO BE IT. IN THE MEANTIME ITIS UP TO ALL OF US TO KEEP OUR EYE ON THE REALITIESOF THE SITUATION AND ON WHERE WE WANT TO BE A YEARFROM NOW~ RATHER THAN MERELY ON YESTERDAY ANDTOMORROW.