Customers' Funds

Testifying before SEC last month, Edward H. H. Simmons said he had known that his former fellow Exchange Governor Richard Whitney had used cash belonging to the Gratuity Fund, but had not thought this significant enough to report to the Exchange because using customers' cash was general practice among brokerage houses. SEC regarded this assertion as remarkable, ordered the Exchange to look into the matter.

The Exchange found that on March 31 the 452 member firms handling margin accounts in the metropolitan area were custodians of free cash balances of $245,562,000 belonging to customers. After sampling 60 presumably representative firms with aggregate free customers' balances of $51,349,000, Exchange accountants last week confirmed Mr. Simmons' assertion. The Exchange discovered a general disregard of a joint opinion of seven law firms representing the largest brokerage firms on the Exchange. This opinion, written in 1934 as an aftermath of the Banking Act of 1933 which divorced deposit banking from underwriting and brokerage, held that brokerage firms could legally keep their huge customers' balances so long as they segregated them in such a way that they would be "not available for use by the firm in its general business." Of the 60 sampled firms, just seven made any attempt to live up to this requirement.

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