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In the Midst of Revolution: The SEC, 1973-1981

Foundation for Renewal

80-20 Rule

"I know that all of the persons that think we are wrong are not greedy or lazy or antediluvian. Some of them are the most statesman-like thinkers and figures in our whole financial community. I have to say to such concerned and thoughtful persons that I think they are wrong and that we are right."

- February 12, 1974 "A Look Ahead at the World of Competitive Commission Rates" – Address by SEC Chairman Ray Garrett, Jr. to the Midwest Stock Exchange Conference

In 1974, the SEC issued regulations that provided that membership in the securities markets should be open to those who have the "primary purpose of serving the public as brokers or market-makers."(13) The SEC adopted the definition of "primary purpose" proposed by the Martin Report, using the "80-20 rule" which required a firm to do at least 80 percent of its commission business with unaffiliated customers in order to be eligible for membership in any exchange.(14) In addition, no more than 20 percent of an exchange member's trading volume could be executed on behalf of such affiliates if they also engaged in money management activities, including managing or advising mutual funds.

The reforms addressed the concern over the discounts and deals that large institutional investors often received from brokers and affiliated exchange members. The SEC believed that these types of arrangements hurt overall investor confidence in the markets by creating special status for larger investors that, despite the importance of scale economies for the cost of stock transactions, was perceived by critics as unfair to smaller public investors.

Several smaller exchanges, most notably the Philadelphia-Baltimore-Washington Stock Exchange, considered the 80-20 rule a death blow to its members and its continued operation. Nearly half of their business derived from institutional investor transactions.

While the SEC had reached a compromise with the smaller exchanges in 1973 that incorporated a three-year grace period, formally promulgated as Rule19b-2, all parties realized that the issue of fixed commission rates and their effect on the markets remained central to solving the problem.(15)

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Related Museum Resources

Papers

August 5, 1971

Special New York Stock Exchange Membership Bulletin on report conducted by William McChesney Martin, Jr.

[image] (pdf) (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)

August 6, 1971

The Securities Markets - A Report, with Recommendations, by William McChesney Martin, Jr.

[image] (pdf) (All rights are owned exclusively by NYSE Euronext copyright 2007 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)

October 19, 1973

"Protecting Investors through Comparable Regulation," Speech by Ray Garrett, Jr. to The Bond Club

[document] (pdf) (Courtesy of Harvey L. Pitt)

October 21, 1973

"The Commission and The Traders: A Public Interest Partnership," Speech by Ray Garrett, Jr. to National Security Traders Association

[document] (pdf) (Courtesy of Harvey L. Pitt)

November 12, 1973

"The SEC Goal - Investor Protection with Minimum Regulation," Address by SEC Commissioner John R. Evans to 15th Annual Meeting, National Association of Small Business Investment Companies

[image] (pdf) (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)

November 29, 1973

"Fair Competition Requires Equal Regulation," Remarks by SEC Commissioner John R. Evans to Banking Law Committee, Federal Bar Association"

[image] (pdf) (Courtesy of the estate of John R. Evans; made possible through a gift from Quinton F. Seamons)

February 6, 1974

Statement by James J. Needham, New York Stock Exchange, Inc. before the Financial Markets Subcommittee of the Senate Finance Committee on S.2842 - The Stockholders Investment Act

[image] (pdf) (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)

February 12, 1974

"A Look Ahead at the World of Competitive Commission Rates," Speech by SEC Chairman Ray Garrett, Jr. to the Midwest Stock Exchange Conference

[transcript] (pdf) (Courtesy of Harvey L. Pitt)

March 1974

New York Stock Exchange Board Summary Memorandum on Commission amendments for March 1974

[transcript] (pdf) (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)

March 12, 1974

"Confidence and Liquidity," Speech by SEC Chairman Ray Garrett, Jr. to the Philadelphia-Baltimore-Washington Stock Exchange Membership Conference

[transcript] (pdf) (Courtesy of Harvey L. Pitt)

June 10-11, 1974

The Securities Industrial Revolution - Third Bi-Annual Conference sponsored by the New York Stock Exchange and its Marketing Advisory Committee

[image] (pdf) (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)

July 1974

New York Stock Exchange Board Summary Memorandum on proposed amendment to Rule 325(a) - debt/equity capital requirements for member corporations

[transcript] (pdf) (All rights are owned exclusively by NYSE Euronext copyright 2008 NYSE Euronext, All Rights Reserved, Courtesy New York Stock Exchange Archives)

September 20, 1974

"Brokerage Rates: Competition or Regulation as the Protector of the Public Interest?" - Address by Irwin M. Stelzer, National Research Associates, Inc. before the Securities Industry Association Management Conference

[image] (pdf) (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)

September 24, 1974

Statement by Dr. William C. Freund, New York Stock Exchange, Inc. before the SEC on impact of inflation on the securities industry

[image] (pdf) (All rights are owned exclusively by NYSE Euronext (copyright) 2009 NYSE Euronext. All Rights Reserved, courtesy New York Stock Exchange Archives)