The Battle About Fees

If anything is sacrosanct on Wall Street, it is the fixed minimum commissions that brokers charge their customers for stock trading. So last week, when the head men of the New York Stock Exchange appeared before the Securities and Exchange Commission during its eight-week-old inquiry into brokerage practices, it was only natural that they denounced government proposals to change the system. Big Board President Robert W. Haack warned that abolishing the minimum rates would cripple the world's largest securities market, with damaging consequences for brokerage firms and investors alike. "I have no doubt," he said, "that the securities markets as we know them today would cease to exist." The government and Wall Street thus reached a point of tense confrontation in the bitterest clash since the Pecora investigation in the early '30s.

Under the minimum-rate setup, member brokers of the exchange are required to charge investors no less than the fee prescribed by the exchange for every purchase or sale of securities. The actual amount varies with both the price of the stock and the number of shares traded. For example, a buyer must pay $44 in commissions to get 100 shares of a $50 stock, or $47 for 100 shares of an $80 stock. The Justice Department maintains that this amounts to illegal price fixing. Instead of rigid minimums, it wants free competition among brokers for setting the commission on every trade, large or small.

Parade of Charades. When Justice antitrusters aired that view last April in a formal brief presented to the SEC, the regulatory authority had no choice but to delve into an issue that Wall Street thought had long since been settled by the 1934 Securities and Exchange Act. Hoping to bolster its stand against entirely abolishing fixed rates, the exchange this month offered instead to cut them by an average 19.5% on big deals (1,000 shares or more). That was primarily a defensive tactic, partly impelled by SEC proposals for slightly sharper fee reductions, starting with deals involving 400 shares of stock. Moreover, despite the exchange's supposedly inflexible minimum fees, the SEC hearings have shown that most brokers give up the bulk of their commissions on big trades through fee-splitting arrangements. One witness, Vice

President Robert Loeffler of Investors Diversified Services, condemned this practice as "a shocking parade of charades."

If approved by the SEC, the fee cuts could cost brokers some $150 million of their $2.5-billion-a-year commission income. Much of that money would then remain in the coffers of big institutional investors, indirectly enriching thousands of mutual-fund shareholders and pension-fund contributors. Brokers should be able to bear the loss: soaring trading volume has deluged Wall Street with profits. Last year the net earnings of Merrill Lynch, Pierce, Fenner & Smith, the largest U.S. brokerage house, jumped 25% to $54.6 million, as its operating revenue, mostly from commissions, climbed to $369 million. Profits at Goodbody & Co. rose 78%. The volume surge means that crack securities salesmen today often earn $100,000 a year. In one medium-sized firm, five top men collected $400,000 each last year.

Likely to Quit. Having retreated from positions that the Big Board once vowed to defend, the exchange's Bob Haack gave no further ground in last week's testimony in Washington. He accused the Justice Department of "applying theoretical concepts without supporting facts." Unregulated rates, he said, would cause brokers to switch a good deal of trading from the exchange floor to their offices, creating splintered markets in which ordinary investors would have trouble buying or selling at fair prices. Chairman Gustave L. Levy of the N.Y.S.E. board of governors was even blunter. Justice's proposal, he said, would convert the Big Board into a mere "quotation bureau with limited activity." The reason is that many large firms, including Goldman, Sachs & Co., of which Levy is a senior partner, would be likely to quit the exchange altogether.

It is far from clear whether the exchange's elaborate defense mechanisms will persuade the SEC to leave the fixed-commission system intact. At week's end the Justice Department, which takes a dim view of Wall Street's fears of fee competition, notified the SEC that it will soon submit more evidence to buttress its stand. Never before has the SEC faced such pressures for radical surgery on the heart of the securities business. Even if it should finally side with the stock exchanges, the Justice Department could force the issue into the courts with an antitrust suit. That is a prospect that makes Wall Street shudder.

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