SECURITIES AND ,<,~~~

EXCHANGE COMMISSION ~ \~Washington, D. C. 20549 • ~~liJ

- ( 2 0 2) 7 5 5 - 4 8 4 6 CQ~o

KEYNOTE AnDRESSCONFERENCE ON REGULATING THESECURITIES ACTIVITIES OF COMMERCIAL BANKS" SOLOMON B~OTHERS CE~TER FOR THESTUDY OF INANCIAL INSTITUTIONSNEW ORK UNIVERSITYGRADUATE SCHOOL OF BUSINESS ADMINISTRATION

NEW YORKJ1

NEW YORKOCTOBER 2J 1979

"CRITIQUE OF CURRENT REGULATORY APPROACHES TO THESEPARATION OF COMMERCIAL AND INVESTMENT BANKING"

ByROBERTA S, KABMELJ COMMISSIONERSECURITIES AND eXCHANGE COMMISSION

1.WHEN I SAT DOWN TO WRITE THIS SPEECH I WONDERED WHY

I HAD EVER AGREED TO GIVE IT. MUCH INK HAS BEEN SPILLEDON THE GLASS-STEAGALL ACTJ RANGING FROM PASSIONATE POLITICALRHETORIC TO ARCANE LEGAL ANALYSIS. I DOUBT THAT I HAVE THEWISDOM OR EXPERTISE TO ENGAGE IN A MEANINGFUL CRITIQUE OFTHE REGULATORY SEPARATION OF COMMERCIAL AND INVESTMENTBANKINGJ A SEPARATION WHICH HAS BECOME BOTH TENUOUS ANDFRACTIOUS. I AM EVEN MORE DOUBTFUL THAT I HAVE BECOMESUFFICIENTLY SKILLED AS A PUBLIC OFFICIAL TO SPEAK ON ASUBJECT THIS CONTROVERSIAL WITHOUT OFFENDING SOMEONE ORTAKING A POSITION WHICH WILL COME BACK TO HAUNT ME.

ON THE OTHER HAND) THE GLASS-STEAGALL ACT PRE-DATESTHE SEC AND IT IS NOT ADMINISTERED BY THE SEC. ACCORDINGLYI CAN CRITICIZE OR SUPPORT ITS PROVISIONS WITHOUT UNDUEFEAR OF CONTRADICTING COMMISSION OR STAFF PRONOUNCEMENTS.I CAN POSE AS A CIVILIAN AND SPEAK MY MIND AS A PRIVATECITIZEN.

, WITH THESE DISCLAIMERS) I WILL PROCEED TO GIVE YOU MYVERY PERSONAL VERSION OF WHY THE GLASS-STEAGALL'ACT WASPASSED) WHY IT IS NO LONGER WORKING VERY WELL AS AREGULATORY SCHEME AND WHY THE POLICY DECISION TO SEPARATECOMMERCIAL FROM INVESTMENT BANKING IS NEVERTHELESS WORTHRETAINING.

2.THE POLITICAL CLIMATE IN WHICH THE GLASS-STEAGALL

ACT WAS PASSED IS PROBABLY BEST EVOKED BY THE WORDS OFFERDINAND PECORAJ WHO IN 1933 AND 1934 SERVED AS COUNSELTO THE SENATE COMMITTEE ON BANKING AND CURRENCY IN ITSINVESTIGATION OF STOCK EXCHANGEJ BANKING AND SECURITIESMARKETS PRACTICES. THIS INVESTIGATION LED TO THE ENACT-MENT OF THE FEDERAL SECURITIES LAWSJ AS WELL AS THEGLASS-STEAGALL ACT. (I NOTE IN PASSING THAT PECORAIMMEDIATELY BENEFITED FROM THESE STATUTES BY BEINGAPPOINTED A COMMISSIONER OF THE NEWLY CREATED SEC.)IN 1939J WHEN THE DEPRESSION WAS WANINGJ PECORA WROTEA BOOK TO REMIND THE PUBLIC "WHAT WALL STREET WAS LIKEBEFORE UNCLE SAM STATIONED A POLICEMAN AT ITS CORNERJ

LESTJ IN TIME TO COMEJ SOME ATTEMPT BE MADE TO ABOLISHTHAT POST." 11

WHAT PECORA AND THE SENATE COMMITTEE FOUND WAS "A,

SHOCKING CORRUPTION IN OUR BANKING SYSTEMJ A WIDESPREADREPUDIATION OF OLD FASHIONED STANDARDS OF HONESTY ANDFAIR DEALING IN THE CREATION AND SALE OF SECURITIESJ ANDA MERCILESS EXPLOITATION OF THE VICIOUS POSSIBILITIES OFINTRICATE CORPORATE CHICANERY." 21 WHAT CONGRESS CONCLUDED

11 PECORAJ WALL STREET UNDER OATH XI (1939).21 In. AT 283.

3.WAS THAT COMMERCIAL BANKS MUST DIVORCE THEMSELVES FROMTHEIR SECURITY AFFILIATES. THIS WAS ACCOMPLISHED BY THEGLASS-STEAGALL ACTJ WHICH IN PECORA'S WORDS "DECISIVELYRESCUED COMMERCIAL BANKING FROM ITS ENTANGLEMENT WITHTHE EXTRANEOUS BUSINESS OF SECURITY FLOTATION AND MARKETPLUNGING." 21 IN THE WORDS OF A MORE CURRENT OBSERVOROF THE FINANCIAL WORLD:

"~'.. IN 1933J THE GLASS-STEAGALL ACT FORBADE COMMERCIALBANKS TO OWN COMMON STOCK OR TO UNDERWRITE ANDSELL STOCK OR CORPORATE BONDS TO THEIR CUSTOMERSOR DEPOSITORS; AND T~E BANKS SLOWLYJ GRUMBLINGLYJRETURNED TO BANKING.' ~/

THIS AUDIENCE MAY WELL ASKJ IF THE ISSUE WAS SODECISIVELY RESOLVEDJ WHY ARE WE GATHERED TODAY AT ASEMINAR ENTITLED "REGULATING THE SECURITIES ACTIVITIESOF COMMERCIAL BANKS"? THE ANSWERJ OF COURSEJ IS THAT THEGLASS-STEAGALL ACT DID NOT TOTALLY BAR COMMERCIAL BANKSFROM THE SECURITIES INDUSTRY. LIKE SO MUCH NEW DEALLEGISLATIONJ IT WAS A REACTIVE AND PRAGMATIC RESPONSETO SPECIFIC PERCEIVED WRONGS. THE STATUTE PUT RESTRAINTSON CERTAIN BANKING ACTIVITIESJ RATHER THAN ENUNCIATING ABROADJ PHILOSOPHICAL RATIONALE FOR DIVIDING A FORMERLYHOMOGENEOUS FINANCIAL COMMUNITY INTO TWO SUB-CULTURES.

3/ In. AT 284.!:V MAYERJ THE BANKERS 52 C197lnI

4.SINCE SOME OF THOSE RESTRAINTS ARE ON POTENTIALLY PROFIT-ABLE ACTIVITIESJ AVOIDANCE OF THE STATUTORY RESTRICTIONSHAS BEEN A CHALLENGE FOR BANKERS AND THEIR LAWYERS.

THE MOST POPULAR POLITICAL THEME IN REGULATORY CIRCLESTODAY IS REGULATORY REFORM. AND THE GLASS-STEAGALL ACTIS EASY TO ATTACK UNDER THE BANNER OF DEREGULATION. ITIS EASY TO ARGUE THAT THE LAW ERECTS BARRIERS TO MARKET-PLACE ENTRY BY FIRMS ANXIOUS TO LET COMPETITIONJ RATHERTHAN A BUNCH OF FEDERAL BUREAUCRACIESJ REGULATE THEFINANCIAL WORLD. FURTHERJ HALF A CENTURY HAS PASSEDSINCE THE 1929 STOCK MARKET CRASH AND MANY SOLUTIONS OF THEDEPRESSION PERIOD HAVE BECOME THE PROBLEMS OF OUR INFLATIONPLAGUED ECONOMY. NEVERTHELESSJ I BELIEVE THAT BEFOREANYONE BECOMES OVER-EAGER TO REPEAL THE GLASS-STEAGALLACTJ EITHER IN ONE FULL SWOOP OR BY PIECEMEAL AMENDMENTJCONGRESS AND THE PUBLIC NEED TO EXAMINE FUNDAMENTALISSUES OF NATIONAL POLICY IN THE REGULATION OF OURFINANCIAL INSTITUTIONS.

IF I MAY BE BOLDJ I WOULD CATEGORIZE THOSE ISSUESAS FOLLOWS:

1.

2.

WHAT KIND OF REGULATION IS NECESSARY TO INSUREINVESTOR PROTECTION IN SECURITIES TRANSACTIONS ANDTHE SAFETY OF CUSTOMER DEPOSITS AND OTHERPROPERTY HELD BY COMMERCIAL AND INVESTMENT BANKS?How MUCH CONCENTRATION OF POWER AND WEALTH BY THENATIONS' FINANCIAL INSTITUTIONS IS APPROPRIATE ANDIN THE PUBLIC INTEREST?

5.3. To WHAT EXTENT AND HOW SHOULD THE FEDERAL GOVERN-

~~~iO~J~E~iN~~gI~~N~~~~U~~~S~LLOCATION OF THE4. WHAT CONFLICTS OF INTEREST BY FINANCIAL FIDUCI-

ARIES SHOULD BE PROHIBITED BECAUSE THEY LEAD TOABUSES OF TRUST WHICH IMPAIR CONFIDENCE IN THEFINANCIAL MARKETS? AND

5. ASSUMING THAT A NATIONAL CONCENSUS CAN BE REACHEDON ANY OF THESE ISSUES~ WHAT KIND OF LEGISLATIONWILL BEST ACHIEVE THE OBJECTIVES OF FINANCIALINSTITUTION REGULATION?

UNFORTUNATELY~ MOST OF THESE QUESTIONS ARE NOT EVENADDRESSED~ LET ALONE ANSWERED~BY THE GLASS-STEAGALL ACTOR IDEAS FOR AMENDING THAT LAW CURRENTLY BEING DEBATED.

OFTEN~ REGULATORY AMBIGUITIES OCCUR BECAUSE A LAW ISWRITTEN IN AN UNDULY GENERAL STYLE. WHEN IT COMES TO THESEPARATION OF INVESTMENT AND COMMERCIAL BANKING~ HOWEVER~MANY AMBIGUITIES CAN BE BLAMED ON A LAW WHICH WAS WRITTENWITH GREAT PARTICULARITY TO ADDRESS SPECIFIC ABUSES WHICHCONGRESS BELIEVED LED TO THE DEPRESSION OF THE 1930s.HOWEVER~ BOTH COMMERCIAL AND INVESTMENT BANKING AREDIFFERENT INDUSTRIES TODAY.

6.THE FOUNDATION FOR THE WALL SEPARATING COMMERCIAL AND

INVESTMENT BANKING IS SECTION 16 OF THE GLASS-STEAGALL ACT.THIS PROVISION DIFFERENTIATES WHAT IS PERMISSIBLE FORCOMMERCIAL BANKS FROM WHAT IS PROHIBITED ACCORDING TO THECHARACTER OF THE SECURITIES INVOLVED~ RATHER THAN BY THEACTIVITIES OR SERVICES THAT THE COMMERCIAL BANKS WOULDPERFORM. THAT IS~ IN SOME SECURITIES A COMMERCIAL BANKMAY ACT AS AN AGENT FOR THE ACCOUNT OF A CUSTOMER; IN SOMESECURITIES IT MAY~ SUBJECT TO LIMITATIONS AND RESTRICTIONS~PURCHASE FOR ITS OWN ACCOUNT; AND IN UNITED STATES OBLIGA-TIONS AND GENERAL OBLIGATION MUNICIPALS~ IT MAY DEAL~ ORUNDERWRITE~ OR INVEST. PROBABLY THE STATUTE WAS DRAFTEDWITH SUCH PARTICULARITY SO AS TO BE DIRECTED SPECIFICALLYAT THE ABUSES UNCOVERED BY THE PECORA INVESTIGATION.THOSE ABUSES OCCURRED IN AN ERA OF BOOMING EQUITIES MARKETS.IF BANKS HAD BEEN INVOLVED INSTEAD IN REITs OR FUTURES CON-TRACTS ON FINANCIAL INSTRUMENTS WHEN THE CRASH CAME~ THEGLASS-STEAGALL ACT MIGHT HAVE BEEN DRAFTED VERY DIFFERENTLY.

BECAUSE THE GLASS-STEAGALL ACT DEFINES WHAT ACTIVITIESARE APPROPRIATE FOR COMMERCIAL BANKS BY THE SECURITIESINVOLVED IN A TRANSACTION~ AND BECAUSE BANKS ARE NOTCONSIDERED BROKER-DEALERS UNDER THE SECURITIES LAWS~THE STATUTES HAVE RESULTED IN SOME ANOMALOUS REGULATION.

7.IDENTICAL BUSINESS ACTIVITIES PERFORMED BY DIFFERENTINSTITUTIONS ARE FREQUENTLY SUBJECT TO DISSIMILARREGULATION. ALSOJ REGULATION HAS BEEN UNABLE TO EFFECTIVELYKEEP PACE WITH THE CHANGING CHARACTERISTICS OF PARTICULARSECURITIES AND THEIR MARKETS.

LET ME TALK TO YOU FOR A FEW MINUTES ABOUT THE PROBLEMOF SIMILAR SERVICES BEING SUBJECT TO DIFFERENT REGULATIONBECAUSE THIS IS A PROBLEM TO WHICH THE SEC DIRECTED ITSATTENTION IN ITS REPORT ON BANKS' SECURITIES ACTIVITIESCOMMONLY CALLED THE BANK STUDY. IN 1975J CONGRESS ADOPTEDSECTION 11A(E) OF THE SECURITIES EXCHANGE ACT OF 1934("EXCHANGE ACT"») DIRECTING THE SEC TO STUDY THE EXTENT TOWHICH BANKS MAINTAIN ACCOUNTS ON BEHALF OF PUBLIC CUSTOMERSFOR BUYING AND SELLING PUBLICLY-TRADED SECURITIES ANDWHETHER THE EXCLUSIONS OF BANKS FROM THE EXCHANGE ACT'SDEFINITIONS OF "BROKER" AND "DEALER" ARE CONSISTENT WITHTHE PROTECTION OF INVESTORS AND THE OTHER PURPOSES OF THATACT. IN SHORTJ CONGRESS ASKED WHETHER BANKS -- WHICH MAYEFFECT AGENCY TRANSACTIONS WITHOUT RESTRICTION -- SHOULDBE SUBJECT TO THE SAME REGULATION IN EFFECTING THOSETRANSACTIONS AS THE BROKERAGE COMMUNITY.

THE BANK STUDY IDENTIFIED A NUMBER OF AREAS IN WHICHBANK SERVICES WHICH ARE FUNCTIONALLY EQUIVALENT TO THOSEOF BROKER-DEALERS DID NOT APPEAR TO BE SUBJECT TO AN

ENTIRELY ADEQUATE REGULATORY STRUCTURE. BUT~ ALTHOUGHRECOGNIZING THE NEED FOR UNIFORMITY IN REGULATING SIMILARSECURITIES ACTIVITIES~ THE BANK STUDY PROCEEDED ON THEASSUMPTION THAT CONGRESS SOUGHT TO MAINTAIN~ TO THEGREATEST EXTENT POSSIBLE~ THE REGULATION OF BANK ACTIVITIESBY THE FEDERAL BANKING AGENCIES. ACCORDINGLY~ THE COMMIS-SION RECOMMENDED THAT THE BANKING AGENCIES ENACT ANDENFORCE SPECIFIC RULES AND REGULATIONS GOVERNING THE CONDUCTOF BANKS IN THEIR SECURITIES ACTIVITIES~ UPGRADE THEIREXAMINATION PROCEEDINGS IN RESPECT TO SUCH ACTIVITIES~AND ADVISE THE COMMISSION OF ACTUAL OR POTENTIAL VIOLATIONSOF THE FEDERAL SECURITIES LAWS WHICH ARE UNCOVERED INTHESE EXAMINATIONS. IN ADDITION~ IN URDER TO RESOLVE ASUBTLE BUT SIGNIFICANT REGULATORY ANOMALY THE SEC RECOM-MENDED THAT THE FEDERAL BANKING AGENCIES SHOULD BESPECIFICALLY MANDATED TO ACT FOR THE PROTECTION OF INVESTORSIN ADDITION TO THEIR EXISTING STATUTORY OBLIGATIONS.

ALTHOUGH THE COMMISSION'S RECOMMENDATIONS WERE INTRO-DUCED IN A PREVIOUS CONGRESS BY SENATOR WILLIAMS~ NO ACTIONHAS YET BEEN TAKEN UPON THEM. 51 THE FEDERAL BANKINGAGENCIES~ HOWEVER~ HAVE ADOPTED MANY -- BUT CERTAINLY NOTALL -- OF OUR RECOMMENDATIONS AS PART OF THEIR RULES ANDREGULATIONS. 6/ THEREFORE~ THE DISPARITY OF REGULATION

S. 2131~ 95TH CONG.~ 1ST SESS. (SEPT. 22~ 1977).SEE~ E.G.~ FEDERAL RES~RVE SYSTEM REGULATIONrz-tF~ECTION 20S.S(K).

9.OF SIMILAR SERVICES HAS BEEN SOMEWHAT DIMINISHED} ALTHOUGHNOT ELIMINATED. BUT ONE CONTINUING DISPARITY THAT ONLYCONGRESS CAN REMEDY IS TO PLACE ON THE BANK REGULATORYAGENCIES INVESTOR PROTECTION MANDATES IN ADDITION TOTHEIR RESPONSIBILITIES TO BANK DEPOSITORS.

ANOTHER PROBLEM INHERENT IN DEFINING PERMISSIBLEBANKING ACTIVITIES ACCORDING TO THE KIND OF SECURITYBEING BOUGHT OR SOLD IS THAT THE COMPOSITION OF THESECURITIES MARKETS HAS CHANGED SINCE THE 1930s.MUNiCIPAL SECURITIES WHICH WERE A MINOR FINANCINGMEDIUM DURING THE DEPRESSION SUBSEQUENTLY BECAME AMAJOR FACTOR IN THE MARKETPLACE. ALTHOUGH THE SECURI-TIES LAWS WERE AMENDED TO CREATE THE MUNICIPAL SECURITIESRULEMAKING BOARD1 THE GLASS-STEAGALL ACT HAS REMAINEDTHE SAME. SOMETIMES BUSINESS REACTS TO MARKETPLACECHANGES BY CREATING NEW ARRANGEMENTS TO AVOID THEIMPACT OF A REGULATORY SCHEME. FOR EXAMPLE1 MAJOR BANKSREPORTEDLY ARE INTERESTED IN DISTRIBUTING PRE-SOLDPRINCIPAL REVENUE BONDS IN PRIVATE PLACEMENTS IN WHATTHEY ASSERT TO BE AN AGENCY CAPACITY. ZI

II SECURITIES WEEK 1 (SEPT. 101 1979).

10.THE REGULATORY LAG CAUSED BY DEFINING PERMISSIBLE

ACTIVITIES ACCORDING TO THE SECURITIES INVOLVED IN APARTICULAR TRANSACTION IS MOST OBVIOUS WHEN NEW SE~URITIESPRODUCTS ARE CREATED. SUCH PRODUCTS RAISE HARD QU*STIONSAS TO STATUTORY COVERAGE BECAUSE CONGRESSIONAL INTENT ISREALISTICALLY NON-EXISTENT. IN THIS CONNECTION~ QUESTIONSBEING RAISED CONCERNING THE CONTINUING VIABILITY OF THEGLASS-STEAGALL ACT ARE DUE AS MUCH TO THE NEW BUSINESSACTIVITIES OF INVESTMENT BANKERS AS TO THE ALLEGEDENCROACHMENT OF THE BANKING INDUSTRY UPON THE TRADITIONALBUSINESS OF THE SECURITIES INDUSTRY.

NEW PRODUCTS BEING OFFERED BY THE SECURITIES INDUSTRYHAVE LED TO COMPLAINTS ABOUT ENCROACHMENT BY THE BANKINGINDUSTRY. THE USE OF MARGIN SECURITY CREDIT AS A SOURCEOF CAPITAL FOR MAKING COMMERCIAL LOANS TO MARGIN ACCOUNTCUSTOMERS~ PARTICULARLY WHEN SUCH FUNDS CAN BE ACCESSED WITH

,A BANK CREDIT CARD~ IS RECEIVING INCREASING ATTENTION.WHEN SUCH A PROGRAM IS CPMBIN~D WITH A MONEY MARKET FUND~

, .THE BANKING COMMUNITY HAS BEEN CLAIMING THAT BROKERS AREEFFECTIVELY ENGAGED IN DEPOSIT BANKING. 81

,

RUSTIN~ "WANT NEw SKiS? CHARGE THEM TO MARGIN ACCOUNT~"WALL STREET JOURNAL L (JUNE 30~ 19/7).

11.MONEY MARKET FUNDS ARE ANOTHER SUCCESSFUL NEW PRODUCT

WHICH SEEM TO HAVE ELUDED THE CATEGORIES ESTABLISHED BY THEGLASS-STEAGALL ACT. YET THE LARGEST OF SUCH FUNDS NOW HASALMOST $7 BILLION IN ASSETS. ~/ RECENTLY~ THE SIZE OF THEMONEY MARKET INDUSTRY IN ONE MONTH ALONE INCREASED OVER$3 BILLION. lQI WHEN SUCH FUNDS HAVE CHECK REDEMPTIONPRIVILEGES AS LOW AS $250~THE DISTINCTION BETWEEN THEMAND NOW (NEGOTIABLE ORDER WITHDRAWAL) ACCOUNTS IS TENUOUS.

BECAUSE BANKERS AND BROKERS ARE EAGER TO PROVIDESIMILAR SERVICES AND BECAUSE NEW SECURITIES AND SERVICESHAVE BEEN CREATED WHICH WERE NOT CONTEMPLATED OR IMAGINEDBY CONGRESS IN 1933~ IT IS NOT SURPRISING THAT BOTH SIDESARE WILLING TO PURSUE THE POSSIBILITY OF PROFITABLEBUSINESS IN DEROGATION OF THE PRINCIPLES OF THE GLASS-STEAGALL ACT. FURTHER~ IT IS NOT SURPRISING THAT BANKERSAND BROKERS EACH INVOKE THE SHIELD OF THE GLASS-STEAGALLACT TO CLAIM UNFAIR COMPETITION.

BUT THE GLASS-STEAGALL ACT WAS NOT INTENDED TO BE ASHIELD AGAINST COMPETITION FOR ANY SEGMENT OF THE FINANCIALWORLD. IN PUNATIVELY SPLITTING THE FINANCIAL WORLD INTOCOMMERCIAL BANKING AND INVESTMENT BANKING SEGMENTS~

9/ WALL STREET LETTER 6 (AUG. 20~ 1979)'lQ/ "MONEY MARKET FUND SALES SET A RECORD A~AIN IN AUGUST~"

WALL STREET JOURNAL 56 (SEPT. 26~19/9).

12.CONGRESS WAS NOT CONCERNED ABOUT PROTECTING EITHER INDUSTRYFROM THE COMPETITION OF THE OTHER. RATHERJ CONGRESSINTENDED TO PROTECT THE PUBLIC AND THE AMERICAN ECONOMYAGAINST THE BANKING ABUSES UNCOVERED BY FERDINAND PECORA.AND IF THE SEPARATION OF COMMERCIAL AND INVESTMENT BANKINGIS TO BE REAFFIRMED TODAYJ IT SHOULD BE BECAUSE THERE IS ANON-GOING NEED FOR SUCH PROTECTION. OR THERE ARE NEW PUBLICNEEDS THAT HAVE ARISEN AS A RESULT OF CHANGES IN THE FINANCIALINDUSTRY. As BRANDEIS WARNED YEARS AGO -- FIDUCIARIES SHOULDNOT BE ALLOWED TO PUT OTHER PEOPLE'S MONEY AT RISK FOR THEIRPERSONAL GAIN. 11/ ALSO THE FINANCIAL HEALTH OF BOTH COMMER-CIAL BANKING AND INVESTMENT BANKING IS A PROPER SUBJECT FORCONCERN BY THE FEDERAL GOVERNMENT.

NEVERTHELESSJ THE GOALS OF THE GLASS-STEAGALL ACT MAYNOT BE THE APPROPRIATE CURRENT RATIONALE FOR THE CONTINUEDSEPARATION OF INVESTMENT AND COMMERCIAL BANKING. IN ADDITION)THERE IS SOME QUESTION AS TO WHETHER THAT SEPARATION CANCONTINUE TO BE ACCOMPLISHED BY A STATUTE WHICH SPEAKS INTERMS OF PARTICULAR TRANSACTIONS IN SPECIFIED SECURITIESRATHER THAN GENERALLY PROHIBITING ECONOMIC ACTIVITIES ORPOTENTIAL CONFLICTS THAT ARE OF GOVERNMENTAL CONCERN. THUSJI OBVIOUSLY DO NOT BELIEVE THAT THE OPTIMUM RESOLUTION OFTHE POLICIES AT STAKE IS TO DETERMINE NARROW LEGAL ISSUESJSUCH AS WHETHER BANKS ARE ACTING AS AGENT~ IN PRIVATELYPLACING REVENUE BONDSJ ON A CASE-BY-CASE BASIS.

ll/ L. BRANDEIS) OTHER PEOPLES' ~10NEY (1914)~

13.INSTEAD~ WHAT WE NEED IS A LEGISLATIVE OVERVIEW OF THE

FINANCIAL WORLD RELEVANT TO TODAY'S CHALLENGES. SUCH ANOVERVIEW MAY WELL SHOW THAT THE ABUSES OF THE 1920s --AND~ IN FACT~ THE NEW ABUSES THAT HAVE ARISEN AS A RESULTOF CHANGING PRODUCTS AND MARKETS -- STILL REQUIRE ASEGREGATION OF FUNCTIONS. BUT~ CONTINUED~ THE SEGREGATIONWOULD THEN BE FOUNDED ON A NEW LEGISLATIVE DETERMINATIONOF THE POTENTIAL HARMS INHERENT IN EXISTING PRACTICESAND NOT ON WHAT IS INCREASINGLY BECOMING THE SEMANTICALCHARACTERIZATION OF SECURITIES AND THE AGENCY-PRINCIPALDICHOTOMY.

IN THIS VEIN~ I WOULD LIKE TO RETURN TO THE FIVE ISSUESWHICH I SET FORTH AT THE BEGINNING OF THIS SPEECH AS FUNDA-MENTAL TO THE REGULATION OF OUR FINANCIAL INSTITUTIONS ANDASK HOW WELL THE GLASS-STEAGALL ACT IS ADDRESSING THESEPROBLEMS.

As TO THE SAFETY OF CUSTOMER DEPOSITS AND OTHERPROPERTY HELD BY BANKS~ THE GLASS-STEAGALL ACT SEEMS TOHAVE WORKED REASONABLY WELL AS TO COMMERCIAL BANKS~ ANDDID NOT ADDRESS THE FINANCIAL SAFEGUARDS APPROPRIATE FORINVESTMENT BANKS. THE RISKS POSED TO COMMERCIAL BANKS BYSPECULATIVE SECURITIES INVESTMENTS NOT PROHIBITED BY THE .GLASS-STEAGALL ACT~ FOR EXAMPLE REITS~ GINNIE t1AE FORWARDS

14.AND SHORT TERM MUNICIPAL BONDS~ WOULD INDICATE A NEED FOR MORE~RATHER THAN LESS~ RIGOROUS PROHIBITIONS UPON PRINCIPALSECURITIES INVESTMENTS. THE NEED FOR GREATER SAFEGUARDS FORTHE PROTECTION OF CUSTOMER PROPERTY HELD BY INVESTMENT BANKSBECAME APPARENT DURING THE LATE 1960s AND LED TO THE ENACTMENTOF THE SECURITIES INVESTMENT PROTECTION ACT OF 1970.

AT THE SAME TIME~ THE LOW LEVEL OF CAPITAL FORMATION INTHE NATION'S ECONOMY COULD LEAD TO A POLICY OF ENCOURAGINGGREATER RISK TAKING BY OUR FINANCIAL INSTITUTIONS. THEIRREGULATING CAPITAL MIGHT BEST BE UTILIZED IN EQUITY INVESTMENT.

IN A VARIETY OF LAWS~ AMERICANS HAVE TRADITIONALLYDEMONSTRATED AN AVERSION TO THE CONCENTRATION OF ECONOMICAND POLITICAL POWER BY BANKS. IT PROBABLY CAN BE ARGUEDTHAT THE SEPARATION OF COMMERCIAL AND INVESTMENT BANKINGMANDATED BY THE GLASS-STEAGALL ACT HAS PROVEN A BETTERREGULATOR THAN THE ANTI-TRUST AND OTHER LAWS FOR CURBINGTHE EXCESSIVE AGGREGATION OF BANKING POWER IN ONLY A FEWFINANCIAL INSTITUTIONS.

As A REGULATOR OF THE SECURITIES INDUSTRY I MUSTNECESSARILY BE CONCERNED ABOUT THE IMPACT UPON THAT INDUSTRYWHICH WOULD BE CAUSED BY THE EXPANSION OF THE SECURITIESACTIVITIES OF COMMERCIAL BANKS -- FOR EXAMPLE BANK ENTRYINTO THE REVENUE BOND MARKET. AND I DO NOT BELIEVE THEPUBLIC WILL BE WELL SERVED BY A FURTHER CONTRACTION AND CONCEN-TRATION OF THE SECURITIES INDUSTRY. AT THE SAME TIME~ I DO NOTBELIEVE THAT IT IS APPROPRIATE FOR THE SEPARATE FINANCIAL

15.REGULATORY AGENCIES TO REACT TO PROPOSED REGULATORY CHANGESBY TRYING TO PROTECT THEIR OWN JURISDICTIONS. BUT IF BANKSARE PERMITTED GREATER LATITUDE IN COMBINING COMMERCIAL ANDINVESTMENT BANKING~ SOME CONSOLIDATION OF SUPERVISORYREGULATORY AGENCIES WOULD PROBABLY BE REQUIRED FOR PROPEROVERSIGHT. IN SHORT~ I BELIEVE THAT ANTI-TRUST TYPE CON-SIDERATIONS ARE AMONG THE MOST IMPORTANT BUT ALSO THE MOSTDIFFICULT OF RESOLUTION AND THEY ONLY LURK IN RATHER INCOHATEFORM IN THE GLASS-STEAGALL ACT.

THE ROLE OF THE FEDERAL GOVERNMENT IN ALLOCATING THENATION'S FINANCIAL RESOURCES IS ADDRESSED BY THE FEDERALBANKING AND SECURITIES LAWS. HOWEVER~ THE SPECIFIC PROHIBI-TIONS OF THE GLASS-STEAGALL ACT AND ITS FAILURE TO KEEP PACEWITH MARKETPLACE DEVELOPMENTS HAVE PERMITTED CONSIDERABLEDISINTERMEDIATION IN THE MONEY MARKETS. MOREOVER~ THE EXTENTTO WHICH THE GROWTH OF MONEY MARKET FUNDS HAS UNDERMINEDREGULATION QJ FOR EXAMPLE~ IS AN IMPORTANT BUT UNANSWEREDQUESTION. HOWEVER~ THE TAX LAWS PROBABLY ARE A BIGGERFACTOR IN DETERMINING HOW NATIONAL RESOURCES ARE ALLOCATEDTHAN EITHER THE BANKING OR SECURITIES LAWS.

THE PROHIBITION OF CONFLICTS OF INTEREST PERCEIVED BYCONGRESS AS IMPROPER IS BASIC TO THE GLASS-STEAGALL ACT.FUNCTIONAL SEGREGATION OF INVESTMENT AND COMMERCIAL BANKINGIS A RESPECTABLE REGULATORY MECHANISM FOR PREVENTING

16.CONFLICTS OF INTEREST. ALTHOUGH IN OTHER AREAS~ FEDERALLAW HAS RESOLVED CONFLICTS OF INTEREST BY DISCLOSURE~ THEELIMINATION OF POSSIBLE CONFLICT SITUATIONS IS OBVIOUSLYMORE EFFECTIVE.

As I HAVE INDICATED~ UPDATING AND FORMING A NEWNATIONAL CONCENSUS ON THE SEPARATION OF COMMERCIAL ANDINVESTMENT BANKING WOULD NOT BE EASY. THE ANSWERS TOTHE REAL POLICY PROBLEMS POSED ARE NOT OBVIOUS. YET THEMECHANISM BY WHICH THE GLASS-STEAGALL ACT ENFORCES SUCH ASEPARATION IS NOT IN THE BEST WORKING ORDER. IF THEBASIC OBJECTIVES OF THE STATUTE ARE NOT REEXAMINED~ ANDTHEN EITHER REAFFIRMED OR REJECTED~ COMMERCIAL BANKS ARELIKELY TO BECOME MORE AND MORE INVOLVED IN SECURITIESACTIVITIES AND INVESTMENT BANKS ARE LIKELY TO BECOME.MORE AND MORE INVOLVED IN ENCOURAGING THEIR CUSTOMERS TO~AMONG OTHER THINGS~ INVEST IN MONEY MARKET INSTRUMENTSOUTSIDE COMMERCIAL BANKING CHANNELS.

OUR NATION'S FINANCIAL INSTITUTIONS ARE TOO IMPORTANTTO BE PERMITTED TO DRIFT IN THE ABSENCE OF EFFECTIVEPOLICY AT THE FEDERAL GOVERNMENT LEVEL. IT IS FASHIONABLETODAY TO SAY THAT THE MARKETPLACE IS THE BEST REGULATOROF ECONOMIC ACTIVITY~ BUT I AM SKEPTICAL. THE OBJECTIVEOF THE MARKETPLACE IS NOT TO BENEFIT THE GENERAL WELFAREBUT RATHER INDIVIDUAL PARTICIPANTS. FURTHER~ MAXIMIZING

17.ECONOMIC EFFICIENCY IS ONLY ONE OF MANY OBJECTIVES OFGOVERNMENT REGULATION. TODAYJ WHEN THE PUBLIC DISTRUSTSGOVERNMENT AND BUSINESSJ I BELIEVE THAT A FAILURE OFFEDERAL REGULATION TO EFFECTIVELY CONTROL AND DIRECTFINANCIAL INSTITVTION RESOURCES FOR THE PUBLIC INTERESTWILL FURTHER REDUCE PUBLIC CONFIDENCE IN THE ECONOMY.

THE GLASS-STEAGALL ACT AND RELATED NEW DEAL BANKINGAND SECURITIES LEGISLATION WERE THE PRODUCT OF POLITICALGROUPS WHICH FEARED BIGNESS GENERALLY AND WERE PARTICULARLYFEARFUL OF WALL STREET DOMINATION OF THE ECONOMY. 12/TODAYJ WHEN THE FINANCIAL MARKETS ARE INTERNATIONALJ ANDMANY AMERICANS ARE MORE CONCERNED ABOUT THE THREAT OF THEUNIVERSAL FOREIGN BANKS THAN THE WALL STREET BANKSJ AREEXAMINATION OF THE HISTORICALLY SPECIFIC AND PROVINCIALLEGISLATION OF ROOSEVELT'S HUNDRED DAYS IS APPROPRIATEJ

EVEN IF ONLY TO REAFFIRM THE POLITICAL AND ECONOMIC JUDGMENTSTHEN MADE.

12-1 SCHLESINGERJ THE COMING OF THE NEW DEAL 439-40 (1959).