Securities and Exchange Commission Historical Society

Born Regulated

Self Help and the New Deal

"It is now generally admitted in Washington and elsewhere that the Investment Bankers Code was certainly one of the best, if not the best, and most effective codes of the lot. Under it the industry had some eighteen months' experience at regulating itself..."

- June 17, 1938 Memorandum re Self-Regulation and the Maloney Bill

Before the New Deal, OTC broker-dealers had been subject to some limited regulation. Between 1911 and 1931, every state but one passed a so-called "blue sky law" regulating the process of public offerings and requiring registration of brokers and brokerage firms.

The industry itself took some tentative steps toward self-regulation. In 1912, representatives from investment houses in all parts of the United States gathered in New York to form a trade group called the "Investment Bankers' Association of America" (IBAA), with a stated goal of "improving the standard of those engaged in investment banking" and protecting "the investment public."⁴⁶

But the IBAA had no enforcement power, and many members preferred it that way. The Great Depression, however, convinced an influential few that the Roosevelt Administration's attempt to foster private-sector involvement in new regulatory regimes might be an opportunity. The centerpiece of this effort, the National Industrial Recovery Act (NIRA), authorized the establishment of new "codes" that would be promulgated by private industry. This gave members of the IBAA what they needed: legal sanction behind their standards.

The IBAA created an "Investment Bankers Code Committee," which drafted a "code of fair competition" in late 1933. Within months, a code of "fair trading practices" was also adopted, but the effort had hardly begun when, in 1935, the U.S. Supreme Court pronounced the NIRA, and thus the private-sector industry codes, unconstitutional. Administration officials asked the SEC to enforce the IBAA's codes, but the SEC favored an independent self-regulatory model. The Code Committee, renamed the Investment Bankers Conference Committee (IBCC), pushed ahead, cooperating with—but hardly controlled by—the SEC.⁴⁷

In 1936 the SEC and the IBCC, now the Investment Bankers Conference, Inc., began framing legislation to replace the legal enforcement mechanism that had disappeared with the NIRA. Submitted to Congress in October 1937, the bill, named for Senate Banking Committee Chairman Francis Maloney, provided for SEC recognition of "national securities associations" and included a new Section 15A under the Exchange Act setting forth the criteria qualifying an association for registration with the SEC.⁴⁸

Whereas the Exchange Act had created a new self-regulatory model that enveloped the NYSE and the regional exchanges into a scheme of federal securities regulation, the Maloney Act extended that model to entities other than exchanges. The mandate was much the same. New "national securities associations" were "to protect investors and the public interest, and to remove the impediments to and perfect the mechanism of a free and open market," and to enforce "just and equitable principles of trade." "National securities associations," also operating under the supervision and oversight of the SEC, were likewise obliged to uphold provisions of the federal securities laws and promulgate and enforce their own rules.⁴⁹

After the Maloney Act was signed into law in June 1938, the Investment Bankers Conference worked with the SEC to meet the Act's requirements. Renamed the National Association of Securities Dealers, Inc. (NASD), it registered as an SRO on August 7, 1939. By the end of the year, some 2,616 broker-dealer firms had joined the NASD.

Although the framers of the Maloney Act had anticipated the creation of multiple SROs, perhaps on a regional basis, they were disappointed. It was 36 years before a very different non-exchange SRO, the Municipal Securities Rulemaking Board, was registered under the Maloney Act. Indeed, until 2001, when the National Futures Association registered with the SEC as a "limited purpose national securities association," the NASD had been the one and only securities association to register under Section 15A of the Exchange Act.⁵⁰

Investment Bankers Code Committee, 1933-1934

(standing) Joseph R. Swan, Guaranty Company of New York; Daniel W. Myers, Hayden, Miller & Co., Cleveland; George Whitney, J.P. Morgan & Co., New York; Henry B. Tompkins, Robinson-Humphrey Co., Atlanta; Frank Weeden, Weeden & Co., San Francisco; Frank McNair, The N.W. Harris Company, Chicago; Lamartine V. Lamar, Lamar, Kingston & Labouisse, New Orleans; Edward H. Hilliard, J.J.B. Hilliard & Son, Louisville; Sidney J. Weinberg, Goldman, Sachs & Co., New York; George W. Bovenizer, Kuhn, Loeb & Co., New York; Arthur H. Bosworth, Bosworth, Chanute, Loughridge & Company, Denver; W. Hubert Kennedy, Wells-Dickey Co., Minneapolis; Charles A. Mead (Secretary); Harry S. Grande, Grande, Stolle & Co., Seattle; Lawrence Marks, Lawrence H. Marks, New York; and Orrin G. Wood, Estabrook & Co., Boston; (seated) Frank L. Scheffey (Deputy Managing Director); Rollin A. Wilbur (Managing Director); Paul V. Keyser (Counsel); Francis A. Bonner, Bonner, Troxell & Co., Chicago (Vice Chairman); B. Howell Griswold, Jr., Alex. Brown & Sons, Baltimore (Chairman); Corcoran Thom, American Security & Trust Co., Washington (non-voting committee member); Myron T. Ratcliffe, Assistant Deputy Administrator for Financial Codes, N.R.A., Washington; Karl J. Ammerman, Deputy Administrator for Financial Codes, N.R.A., Washington; and Sydney P. Clark, E.W. Clark & Co., Philadelphia (Treasurer). Code Committee members not in picture: Edward J. Costigan, Whitaker & Co., St. Louis; Ralph T. Crane, Brown Harriman & Co., Inc., New York; and Robert H. Moulton, R.H. Moulton & Co., Los Angeles.

(Courtesy of Joseph Hardiman )

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The Institution of Experience: Self-Regulatory Organizations in the Securities Industry, 1792-2010

Born Regulated

Self Help and the New Deal

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