The Bright Image: The SEC, 1961-1973

An Economic Theory of Regulation Emerges

Facing a Challenge

From 1963 to 1973, the SEC addressed concerns about the commission rate structure, stock exchange membership rules, and problems created in processing stock sales created by the tremendous increases in market volume. Because these issues involved economic, not anti-fraud, concerns, the SEC faced a dilemma as it began to address these concerns.

The SEC had built its regulatory experience around the principles of fiduciary responsibility and full disclosure. It needed to develop an alternative approach to address economic concerns not resolved solely by resorting to principles of fiduciary duty or increased disclosure. The search for an economics-based theory of regulation would challenge the SEC throughout this entire period.

Relying on Section 19(b) of the 1934 Act, which allowed the SEC "to alter or supplement" registered stock exchange rules when "necessary or appropriate for the protection of investors or to insure fair dealing" including "fixing reasonable rates of commission," the SEC began to consider regulatory options. It took a cooperative approach in nudging the New York Stock Exchange to consider and then reform its own commission rate structure, membership rules and back-office procedures for processing stock transactions.

At the same time, a variety of private litigants initiated suit against the NYSE, challenging its fixed commission rate structure under the federal anti-trust laws. Central to the plaintiffs' complaints was an economic argument that promoted competition as a way to reduce costs to investors and promote market efficiency. While the appeals court dismissed the case in Kaplan v Lehman (1967), Chief Justice Earl Warren dissented from the Supreme Court's denial of review. Chairman Cohen read Warren's dissent as a warning to the SEC that it had better get involved in the regulation of commission rates, lest the anti-trust provisions of federal law preempt the possibility of future SEC regulation.

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Related Museum Resources

Papers

April 29, 1965: "Trends in Financial Reporting" - Address by SEC Chief Accountant Andrew Barr before the 19th Annual Conference of Accountants
image pdf (Courtesy of Stephen A. Zeff)
March 12, 1966: Protest Letter from J.E. Hammers to the U.S. Congress
image pdf (Government Records)
May 24, 1966: Address by SEC Chairman Manuel F. Cohen before the 19th Annual Conference of the Financial Analysts Federation
image pdf (Courtesy of Stephen A. Zeff)
October 5, 1966: Address by SEC Chairman Manuel F. Cohen before the 79th AICPA Annual Meeting
image pdf (Courtesy of Stephen A. Zeff)
February 27, 1967: Resignation Letter from SEC Commissioner Byron D. Woodside to President Johnson
transcript pdf (Courtesy of the Lyndon B. Johnson Library and Museum)
February 28, 1967: Memo from Doug Nobles to W. Marvin Watson recommending appointment of Richard B. Smith to SEC
transcript pdf (Courtesy of the Lyndon B. Johnson Library and Museum)
February 28, 1967: Memo from John W. Macy, Jr. to President Johnson recommending appointment of Richard B. Smith as SEC Commissioner, with Mr. Smith's biographical data
transcript pdf (Courtesy of the Lyndon B. Johnson Library and Museum)
June 30, 1967: 33rd Annual Report of the Securities and Exchange Commission
image pdf (Government Records)
January 29, 1968: U.S. Securities and Exchange Commission Litigation Release
document pdf (Courtesy of Libbey Sussan)
February 20, 1968: Memorandum from David L. Ratner to SEC Chairman Manuel Cohen on Rule 10b-5 - Heit v. Weitzen
document pdf (Courtesy of David Ratner)
March 7, 1968: "Some Problems of Disclosure" - Address by SEC Chairman Manuel F. Cohen at the University of Illinois
image pdf (Courtesy of Stephen A. Zeff)
June 30, 1968: 34th Annual Report of the Securities and Exchange Commission
image pdf (Government Records)

Photos

1967: SEC Regional Administrators Conference

(front row) Donald J. Stocking, William Green, Francis Wheat, Hugh Owens, Manuel Cohen, Hamer Budge, Richard Smith, Thomas B. Hart, Arthur E. Pennekamp; (second row) Orval L. DuBois, W. Victor Rodin, David L. Ratner, Andrew Barr, Mahlon M. Frankhauser, Gerald E. Boltz, James E. Dowd, Alexander J. Brown, Jr., James E. Newton, Richard V. Bandler, Solomon Freedman, Irving M. Pollack, Roger S. Foster, Loughlin F. McHugh, Alfred Letzler, Walter P. North; (third row) Ralph L. Bell, Frank J. Donaty, Harry Pollack, Charles E. Shreve, Thomas W. Rae, David Ferber, Philip A. Loomis, Jr., Edmund H. Worthy, Robert H. Bagley, John A. Dudley, Eugene H. Rotberg, Lindsay J. Millard, Aaron Levy, Ernest L. Dessecker, William E. Becker

(Courtesy of Frances Green Oliver )

Oral Histories

19 June 2007 Robert Davenport With Dr. Kenneth Durr

edited transcript (pdf)

19 June 2002 Richard Smith With Richard Rowe

edited transcript (pdf)

Film, Radio And Television

1971

"Can Regulatory Agencies Protect the Consumer?"

Washington Debates for the 70's Television Program, with Manuel F. Cohen, former SEC Chairman; and Dr. George J. Stigler, University of Chicago, Chicago School of Economics; moderated by Peter Lisagor; produced by the American Enterprise Institute

with permission of the American Enterprise Institute and courtesy of the National Archives and Records Administration

video

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