"The Stock Exchange welcomes government regulation and supervision. This does not mean that we have surrendered any of our independence. It does not mean that we have subordinated our own judgment or that we have relinquished our administrative control. It does not imply supine submission. It means simply that we recognize that our government, with full authority from Congress, has set up regulation in our interest and in the public's interest."
Had the stock market recovered from the crash quickly, these reforms might have endured, but it did not. In 1939, William McChesney Martin backed an uncharacteristically defensive measure. The exchange banned members from trading in NYSE-listed stocks on the regional exchanges. This "multiple trading rule" promised to devastate the regional exchanges. In October 1941, the SEC ordered the NYSE to rescind its multiple trading rule. The NYSE complied, but by then, Martin was gone and control of the exchange had returned to the floor.27
The Conway Committee had recommended that the NYSE pare down its unwieldy board of governors. A committee led by specialist Robert Stott further studied the matter. The result was a smaller board, but one that became the "sole policymaking body" for the exchange. The board's chairman, rather than the NYSE president, was now in charge. In 1941 the floor continued its resurgence of power by creating an advisory committee which exercised power delegated to it by the board. The advisory committee took control over disciplinary matters and the manner in which stocks were allocated. With Robert Stott and then fellow specialist John Coleman governing from the chairman's office, the NYSE entered an era of organizational retrenchment and phenomenal growth.28
By the late 1940s, the conservative floor faction of the NYSE had obtained, by way of hitherto unwelcomed federal regulation, a predominant and protected position among the nation's securities exchanges. By tacit approval of a generally passive SEC, the NYSE enjoyed legal sanction for policies and practices that, as usual, favored exchange members over public investors. What has been dubbed "regulatory capture" henceforth ensured that securities regulation would be a two-edged sword, bestowing benefits on and extracting costs from both the regulated community and the investing public.29
(27.) 1939 SEC Memorandum of Law regarding multiple trading rule ; October 6, 1941 Findings and Opinion of the SEC in the matter of the Rules of the New York Stock Exchange
(28.) Sobel, N.Y.S.E., 106-7, 115; Joel Seligman, The Transformation of Wall Street, 3rd ed. (New York, 2003), 324.
(29.) See George Stigler, "The Theory of Economic Regulation," Bell Journal of Economics and Management Science 2 (Spring 1971): 3-21. Although it was documented and named by economist George Stigler in 1971, this phenomenon of "regulatory capture" had been observed since shortly after the creation of the Interstate Commerce Commission in the late nineteenth century.
