Michael J Aitken (December 1990) A HISTORY OF SECURITY REGULATION

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					                     Michael J Aitken (December 1990)


 A HISTORY OF SECURITY REGULATION AND DEREGULATION

                               IN AUSTRALIA


1.0 Introduction


Deregulation of the Australian securities industry did not occur in a vacuum. It

was preceded by a protracted debate about the effect(s) of deregulation on the

efficiency of securities markets with some arguing it would increase efficiency

(Ball and Officer, 1983) and others (AASE, 1982) that it would have the

reverse effect. Deregulation was also preceeded by and ran concurrently with

similar initiatives in other countries (e.g. US and Canada). It also brought to an

end more than one hundred years of self-regulation and monopoly power, the

cornerstones of which were barriers to entry and fixed brokerage rates. As a

means of both raising research questions and providing a broader

understanding of the industry this chapter describes the circumstances both

national and international, which surrounded the decision to deregulate. Such

discussion provides an essential grounding if the results of this particular study

are to be accepted for the purposes of international comparison or as a means

of informing political regimes on the economic effects of deregulation.


With this object in mind this chapter provides a grounding at two levels. It

begins in section two by providing a broad perspective of the development of

security markets in Australia and regulatory initiatives in respect of these

markets. This includes regulatory initiatives (both to increase and decrease

regulation) by the industry itself and by political regimes. At a second level this

chapter provides specific detail of the circumstances surrounding the decision to

deregulate, the major players involved, their arguments and their predictions.

These arguments are outlined in section two. Clearly these levels are not

mutually exclusive, with the latter likely to be a specific consequence of more


                                         1
                              Chapter 2. History



general policy initiatives hence the justification for providing the more general

perspective. One interesting issue arising from this discussion is that of brokers

trading simultaneously as principal and as agent. The discussion will show that

the issue has been a constant source of contention, not only between the broking

profession and regulatory bodies but between brokers themselves. The issue has

remained contentious largely because of the lack of access to information about

principal trading, a situation redressed for the first time in this study. Section

three summarises deregulatory initiatives in the US and outlines issues and

arguments that surrounded both the US and Australian decision to deregulate. A

final section summarises the chapter and places in context the remainder of the

thesis.


2.0 Background to the development of the securities industry in Australia


From the advent of security trading in Australia, stock exchanges have featured

prominently. Until recently (1987) trading was focused around six largely

independent stock exchanges based in the capital cities of the six states of

Australia. Since 1987, however, trading has been centralised through the

Australian Stock Exchange (ASX) and its electronic screen trading system

(SEATS). Notwithstanding these more recent changes, any attempt to describe

the development of the securities industry is necessarily based around the

development of the separate stock exchanges, in particular, the exchanges of

Sydney and Melbourne which, except for brief periods in the industry's

development, have dominated security trading in Australia. In subsequent

discussion therefore attention will be focused on the development of the

Sydney and Melbourne exchanges.




                                         2
                              Chapter 2. History



The Stock Exchange of Melbourne

A reading of Gyles Turner's History of the Colony of Victoria provides an
important insight into the political and economic climate which eventually gave rise
to the need for the services of a stock exchange in Melbourne. The thrust of the
economic argument was that prior to 1850, although growth in the Victorian
economy had been quite high, it had been based on decidedly small scale
investments. Subsequent to 1850 it appears that the need for large scale resource
pooling become quite pronounced. Writing about this need Hall (1968, 2)
commented, "The major change in the level of Victoria's national income which
occurred during 1851-52, the doubling of its population and the prospects of
further rapid growth of both income and population meant that some investment
opportunities emerged which were relatively large scale and which, in
consequence, required the pooling of capital resources of a large number of
people".

The subject of some of these investments included the building of a rail

network between Melbourne and the then recently developed goldfields of

Geelong, the establishment of ports and other municipal services in these two

areas and the provision of banking services. It was in the period when these

sorts of investments began to flourish that the publication of the first

Melbourne stock and share list occurred. It was published under the name of

Edward Khull, 'Stock and Share Broker' and appeared in the Argus on 18

October 1852. From this time until 1859 several other individuals began

offering similar services although it is worth noting that the broking services

themselves were a relatively small part of these individual's businesses and

rather intermittent in nature. In 1859 the Melbourne Brokers' Association was

formed amidst a burst of mining speculation in Melbourne which saw the

number of broking firms increase from four or five to between twenty and

thirty. The appearance of the Brokers' Association (consisting mainly of newly

established brokers) was, according to Hall (1968, 23), the result of an

unsuccessful attempt to establish a first stock exchange. The attempt failed

because brokers could not agree on the rules by which they were to be

governed. In particular, controversy surrounded the issue of whether brokers

should be allowed to act on their own behalf (a practice then referred to as

jobbing, now referred to as principal trading) in respect of security dealings.

After the much published case of Brown v. Cassius1 in which the issue was


                                        3
                              Chapter 2. History



brought to a head, and in the wake of considerable public protest, agreement

was reached in March 1861 to set up a committee to initiate proposals for a

stock exchange referred to as "The Stock Exchange". After a series of meetings

the majority of brokers agreed to be bound by a set of sixty-three rules adapted

from the London and Liverpool exchanges. A list of these rules is provided in

Attachment 2.1 and is discussed in more detail latter. These rules which were

published in the Stock and Share Journal of 8 April 1861 outlined among other

things the procedures for admission to the exchange, defined the function of

brokers, identified the procedures to follow in the buying and selling of shares

and announced accepted scales of brokerage although they did not outlaw

jobbing.


As a direct consequence of the failure to outlaw jobbing several brokers,

notably the more established brokers (led by J.B. Were) failed to join the

exchange and proceeded to conduct business independently. In the Stock and

Share Journal of 15 April 1861, which Were largely controlled, an explanation

of his action appeared:

       The members of the Brokers' Association having adopted new rules for
       their future government, inconsistent in our opinion with the profession
       of a broker, inasmuch as the Association have refused to pass a rule
       prohibiting brokers from jobbing in shares, but on the contrary,
       recognise their dealings in shares, and further, that brokers shall be held
       as principals to each other.

       In consequence of the foregoing, we have withdrawn from membership,
       and declined to subscribe to the new rules, and we purpose (sic)
       continuing our business as stock and share brokers only, as we have
       ever done, in good faith with the public.

       We never have, neither will we, under any circumstances, deal in stock
       or shares, directly or indirectly as principals, and our constituents may
       depend upon our strict adherence to these principles in all our
       transactions.

       We shall be ready to co-operate with other brokers who are willing to
       adopt the same principles as will guide us.

  J.B. Were    J.H. Were




                                         4
                               Chapter 2. History



Speaking on behalf of brokers who joined the initial exchange Robert Wallen,

its secretary, wrote in defence of their position (in the Stock and Share Journal

of 21 January 1861) that:

       With regard to the question of brokers being occasionally themselves
       buyers and sellers of shares, we believe that with an extended market it
       would be preferable that they should not be so; but we firmly believe
       that fluctuations would be much more violent were it not for those
       brokers who frequently buy when the general public are too panic-
       stricken to venture. That such purchases and sales may be, and are,
       effected honestly and without fraud, we unhesitatingly assert.

In 1865, under the Chairmanship of J.B. Were, the Melbourne Stock Exchange

was set up. According to Adamson (1984, 8), who appears to be confused

about the exact name of the body, it consisted of a group of brokers who had

"largely resolved their earlier differences" although no sooner had it been

formed than the old "jobbing" arguments re-emerged. In addition there was a

disagreement about the right of members to report their sales under their own

names in the newspaper. Those favouring freedom in this latter regard broke

away and formed the Stock Exchange of Melbourne in October 1884. When

the two organisations eventually amalgamated a year later in November, it was

the Stock Exchange of Melbourne which took the upper hand in negotiations

although the Melbourne Stock Exchange was to reappear in name in 1886

(Hall, 180). Adamson (1984, 18) reports attempts to establish opposition

exchanges during the late 1880s, but neglects explanations for their demise. For

his part Hall (1968, 173-186) notes that the three primary rivals of the Stock

Exchange of Melbourne - the Melbourne Stock Exchange, the Victorian Stock

Exchange and the Australian Open Exchange Company - all languished as their

turnover fell in comparison to the Stock Exchange of Melbourne. Although

Hall cites other reasons for the demise of each of the rival exchanges he

concludes that "By the middle of 1889, ... rivals of the previous year were no

longer of serious concern to the Exchange" (Hall, 1968, 187). The market

share of these alternate exchanges continued to decline as the Stock Exchange



                                         5
                              Chapter 2. History



of Melbourne relaxed its rules in respect of "jobbing", so much so that Hall

(1968, 235) notes that in 1894, "...the Chairman claimed that virtually everyone

of any significance conducting share business in Melbourne now did so either

as a broker or as a jobber on the Stock Exchange of Melbourne".


From this point to the present all semblance of competition appears to have

disappeared from the Melbourne security market, a situation which was

eventually to lead to the intervention into the industry of the Trade Practices

Commission in the early 1980s.


Regulatory Initiatives Paralleling the Development of the Stock Exchange of

Melbourne


From the very first attempts to establish a stock exchange in Melbourne in the

early 1860s to the present day, responsibility for regulating the security

industry in Melbourne has remained largely with stockbrokers themselves.

Apart from one unsuccessful attempt in 1891 by the government of the day to

introduce a Shareholders' Bill, no direct regulations were imposed on the

security industry until 1937 when the incumbent government passed the Stock

and Sharebrokers Act. It is to be acknowledged however that certain sections

of the Companies Acts, especially those dealing with prospectuses, did impose

conditions upon companies who sought to raise capital with the help of

sharebrokers. However, this regulation invariably complemented the efforts of

sharebrokers rather than overrode or contradicted them.


Although it is clear from comments made in Baillie and Butler's Weekly Share

Market Commentary of 22 October 18582 that consideration was given to

involving people other than sharebrokers in the administration of the industry

no such policy became operative, with the majority of brokers preferring, it

seems, to regulate themselves. The first piece of ostensible regulation appears

to have emanated from the Melbourne Brokers' Association in October 1860


                                        6
                               Chapter 2. History



when (except for one member) agreement was reached about what appears to

have been the first uniform rates of brokerage. These were:

On shares sold for £5 per share and upwards - 1%

On shares sold for £1 and under £5 per share - 1/- per share

On shares sold for less than £1 - 6d per share

On debentures - 1/2 %

On sales of 500 shares and upwards, the rates of brokerage may be reduced, by
special agreement only, to not less than the minimum rate of 6d pershare. When
a brokerage at the above rates would not amount to 10/-, that sum will be
charged.

The next identifiable attempt to introduce regulation occurred in April 1861

when a second unsuccessful attempt was made by the Brokers' Association to

form an exchange. Sixty-three rules adapted from the London and Liverpool

exchanges were accepted by all but a handful of sharebrokers. These rules:

       ...outlined the procedures for admission to the exchange; defined the
       functions of brokers, jobbers, and subscribers; indicated the main
       procedures to be followed in the buying and selling of shares; provided
       for the treatment of defaulters and insolvents; announced the accepted
       scale of commissions; stated the conditions governing the issue of an
       official price list; and prescribed the hours of business and scale of
       entrance fees and annual subscriptions (Hall, 1968, 31) (see Attachment
       2.1).

The spirit of these rules remained largely unchanged for the subsequent

formation of the Melbourne Stock Exchange in 1865 and the Stock Exchange

of Melbourne in 1884 (see Attachment 2.2). If any changes were noticeable

they were to streamline the number of rules and to make them more a product

of the Australian economic environment. On this point Hall (1968, 101) notes

that, "Whilst the 1978 rules can still be traced back to the practice of the

London Stock Exchange, the particular selection of the London rules and their

form of words obviously bears the stamp of local conditions".


Two distinct sections in the rules can be identified. The first dealing with the

structure and organisation of the exchange itself and the second dealing with



                                         7
                                Chapter 2. History



the conduct of the market. The former dealt with the relationship between

individual brokers and the management committee of the exchange including

entrance and annual subscription fees and consisted of some sixteen rules. The

latter, consisting of only six rules, dealt with the rights of buyers and sellers as

well as minimum marketable parcels and agreed rates of brokerage. In respect

of brokerage charges two changes were made. Nominal rates of brokerage on

mining shares were halved and the modern practice of separate payment of

buying and selling brokerage had been adopted for mining shares. Conspicuous

by their absence were any rules relating to the function of brokers and jobbers,

rules which had been the subject of considerable controversy since their

introduction in 1861 by the Brokers' Association. Under serious competition

from alternate exchanges and jobbers in the late 1880s and early to mid-1890s,

brought about by significant increases in security trading, the exchange

replaced its rules for the entry of jobbers and members from other exchanges

with considerable success (Adamson, 1984, 29). These rules were subsequently

tightened in the economically depressed times of 1899 when it was discovered

that jobbers were acting in contravention of rules by performing brokerage

tasks. These rules began to be strictly enforced and when in 1906 the exchange

banned the sharing of commissions with anyone except an agent (Adamson,

1984, 30) the fortunes of jobbers took a turn for the worse. This resulted in the

gradual disappearance of jobbers from the market, a pattern which was

completed by 1925 when, according to Adamson, not one jobber existed. What

is not clear from Adamson's discussion is whether jobbing disappeared

altogether or whether it disappeared in name only. Subsequent analysis tends to

support the latter view.


Apart from this regulation there were no other significant changes in the

internal organisation of the exchange until 1900. In respect of the conduct of

the market, separate buying and selling brokers were introduced on debentures



                                          8
                               Chapter 2. History



in 1895 but the practice of single shared brokerage on investment shares was

continued. Listing requirements had been agreed to in 1886 which included

"...the receipt of such information as it might require by the Exchange

Committee to ensure that transfers of scrip would be available" (Adamson,

1984, 15), however, the Stock Exchange of Melbourne found it difficult to

justify such rules in the situation where other exchanges were free to form at

will. It was not until the late 1890s when opposition exchanges had disappeared

completely that the Stock Exchange of Melbourne began to feel confident

about tightening its listing requirements and indeed its own internal regulations.


Speaking about the latter, Adamson (1984, 34) noted that in 1898 "..the

exchange passed a rule that 'No member shall join or become interested in or

connected with a partnership for the purpose of stock of sharebroking without

first obtaining the consent of the Committee'". In respect of the former

Adamson commented that in 1905 "...the Stock Exchange decided to take a

tougher view to listing, ruling that all future applications for quotations must

have a list of registered shareholders, and unless a fair proportion of them are

in the name of the public, quotation would not be granted" (1984, 40).


From the early years of the twentieth century the first attempts were made to

co-ordinate the activities and rules of each of the separate exchanges. In 1903

the first official meeting of the Adelaide, Sydney, Melbourne and Brisbane

exchanges occurred. The meeting reportedly discussed uniform brokerage,

methods of dealing and settlement, although few issues were resolved. The

issue of brokerage was followed up in the 1906 meeting where it was decided

that each stock exchange's rules should be amended to insist on uniform rates

of brokerage for their members and the elimination of allowances by rebate,

return of commissions or otherwise, except to members of other stock

exchanges provided they were more than twenty miles from the GPO. The

1906 meeting also resolved to seek uniformity in listing rules. This did not


                                         9
                               Chapter 2. History



occur for some time however. It was not until 1954 that listing requirements

were issued under the imprimatur of the Australian Associated Stock

Exchanges (AASE)3 an organisation which dates from 1937. Although a

considerable degree of uniformity had been achieved prior to this date, with the

Sydney and Melbourne listing rules having been identical since 1936, each

exchange continued to publish its own listing rules separately until 1958

(Gibson, 1971, 75). As an example, after the 1922 meeting of the exchanges,

all but the Adelaide exchange agreed to uniform rates of brokerage in respect

of mining stock (Adamson, 1984, 58). Also decided at this meeting was a

proposal that the Brisbane Stock Exchange be permitted to grant quotations on

its official list to companies listed on other exchanges under the same

conditions as they were listed on the other exchanges. This move was seen as

the forerunner of uniform listing requirements, a cause aided by the formation

of the AASE in 1937.


The year 1937 also saw the first successful regulatory intervention by the

government of the day. The action followed the unexpected collapse of the

broking firm of Edward Ward and Co. which suggested the need for some sort

of fidelity fund to mitigate the consequences to the victims of such a default.

Although the exchange itself reacted to the situation initiating regular audits of

brokers' accounts as well as requiring members to set up trust accounts to deal

with clients' moneys such provisions were made mandatory by the passing of

the Stock and ShareBrokers Act. The Bill also called for surprise audits of

brokers' books. This Act was amended several times over the next twenty-nine

years and along with the Marketable Securities Bill (introduced in 1966 to

speed up the transfer of shares), both were incorporated in consolidating

legislation referred to as the Securities Industry Act of 1975. Except for minor

amendments, the provisions of this Act remain in force today. Attachment 2.3

and 2.3(a) detail the progress of this legislation since 1937. Among other things



                                        10
                               Chapter 2. History



this legislation deals with the setting up of exchanges, the licensing of brokers,

the conduct of securities business; accounting and audit provisions in respect of

brokers' account, the use of fidelity funds and procedures for trading in

securities. Since 1981 this legislation has been uniformly accepted in all states

of Australia. Under an agreement signed on 22 December 1978 for co-

operative regulation of companies and the securities industry, legislation is now

enacted through the Commonwealth parliament and simply sanctioned by the

individual state parliaments. Unlike the situation existing prior to 1937 where

the exchange self-regulated both its internal organisation and the conduct of the

market, this responsibility is now jointly shared by the exchange and the

government of the day.


The Stock Exchange of Sydney


Although share trading began in New South Wales around 1828 (when Matthew

Gregson of Sydney was given permission to trade in shares of the Bank of New

South Wales) it was not until May 1871 that the forerunner to the modern day

Sydney Stock Exchange was formed. Details are sketchy regarding the exact

reasons for the exchange's formation but it seems likely to have evolved as the

result of a number of factors. One such factor was the advent of a large copper

and tin mining boom about that time. As with any new mineral discovery the

need arose for large amounts of public funding to exploit the discovery. The

raising of such funding was considerably aided by the pressure of an official

capital market mechanism - a stock exchange being such a mechanism. Another

factor leading to the formation of a stock exchange was the growing maturity

and association of the five or six brokerage houses which had been in existence

since the mid to late 1850s and early 1860s. No doubt a further reason for its

formation was to match similar developments in Melbourne in 1865.




                                        11
                               Chapter 2. History



The Sydney exchange continued largely unchallenged until the late 1880s when

three more exchanges were formed. The only other organised market to be

initiated during this period was the New South Wales Brokers' Association

which was set up three months after the Sydney exchange. In an environment

of very infrequent trading (sometimes as little as three or four trades a day) the

Brokers' Association disappeared some eighteen months later. The appearance

of the other three exchanges; the Sydney Mining Exchange, the Sydney Open

Call Exchange and the Stock Exchange of New South Wales in the late 1880s

coincided with a large upsurge in trading brought about by the Broken Hill

silver boom (1886-93). They lasted for as long as the boom and disappeared

thereafter. The Sydney Stock Exchange continued in existence primarily

because it was supported by brokers who were long-term in their outlook and

because the bulk of its trading was in investment shares rather than mining

shares. As soon as the mining speculators declined, so too did the number of

brokers and the number of exchanges, until once again only the Sydney Stock

Exchange remained. Even this exchange remained on a very small scale until

well after World War 1. In 1890 the exchange only had four people working

for it and this number was less than fifteen some twenty years later, and even

then most of the staff were building maintenance staff. Following a period in

the 1930s where the exchange experienced first a gold mining boom and then

government entry into the market in order to control prices, the exchange in a

spirit of co-operation and consolidation joined with the Stock Exchange of

Melbourne to form the Australian Associated Stock Exchanges in 1937. From

this point onwards the histories of the two exchanges are, but for a few

idiosyncrasies, inseparable.


Regulatory Initiatives Paralleling the Development of the Stock Exchange of

Sydney




                                        12
                               Chapter 2. History



At the inaugural meeting of the Sydney Stock Exchange sixteen rules were

passed dealing exclusively with the internal organisation of the Exchange (see

Attachment 2.4). Among other things the rules dealt with membership

requirements, remedies when there was a failure to settle the relationship

between broker and client and brokerage charges. In respect of brokerage it is

of interest to note that fixed brokerage rates were not a part of normal

exchange life until the early years of the twentieth century, by which time all

remnants of opposition exchanges had disappeared from the market.


Unlike the first rules of the Stock Exchange of Melbourne, these rules do not

appear to have been adapted from the London and Liverpool Exchanges,

although clearly they dealt with very similar matters. One matter they did not

deal with, however, was the conduct of third parties in the market, namely,

those organisations seeking public funding. It was not until 1890 that listing

requirements became formalised and a further twenty-one years before the

exchange first published a full list of these requirements.4


At no time during the early history of the Sydney Stock Exchange did outside

bodies such as state and federal governments impose regulations on the

exchange. Although newspaper reports in 1873 refer of a Stockbrokers' Bill it

is clear that it never became enacted and neither did any other Bill until the

New South Wales Securities Act of 1975. Until this time the Stock Exchange

of Sydney was completely self-regulating.

Regulation of the Australian securities market: an overview

Regulation surrounding the Australian securities markets is generally of two

types described broadly as internal and external regulation. Regulation

described as internal pertains to the conduct of brokers. These regulations, set

out today in a members' handbook, together with the memorandum and articles

of association, deal with membership requirements, client relations, brokerage,



                                         13
                               Chapter 2. History



accounts and audit, delivery and settlement trading, and dealing and

advertising. Regulations described as external relate to the conduct of the

market. At the centre of these regulations is the listing requirements which

prescribe what information companies must give and the practices they must

follow if they are to be granted access to the official capital markets of

Australia. Prior to the early years of the twentieth century beginning as early as

1865 both internal and external regulations were published together. However

they were published separately from about 1925 in Victoria when the first use

of the term Official Listing Requirements was made. Separation occurred a

little earlier in New South Wales in 1911. These rules were substantially revised

following the introduction in 1961 of the Uniform Companies Acts, on a state

by state basis but were finally combined in 1972 when stock exchanges adopted

a policy of national listing meaning that a company once listed was listed for

the purposes of each of the six Australian exchanges.


Of interest is the extent to which these regulations have been designed and

implemented by stock exchanges themselves as opposed to other outside

organisations, in particular government organisations. Prior discussion indicates

that except for one unsuccessful attempt by the government of Victoria to

introduce a Stock and Sharebrokers Bill in 1891 the stock exchanges self-

regulated until 1937. This is not to suggest that external bodies did not have

influence, merely that their influence did not manifest itself in separate

regulation. The situation changed however in 1937, when in the wake of a

brokerage firm collapse, the government of Victoria enacted the Stock and

Sharebrokers Act. This Act called for the setting up and administering of trust

accounts and extensive and impromptu audits of brokers accounts. It was the

first successful attempt to interfere with the internal regulations of stock

exchanges. A similar act was enacted in South Australia in 1945 referred to as

the Sharebrokers Act. Amendments to the Victorian Act occurred twice over



                                        14
                               Chapter 2. History



the next twenty-nine years in 1958 and 1966 until it was finally incorporated

into the Securities Industry Act of 1970. One other Act enacted during this

early period was the Marketable Securities Act 1966. The purpose of this Act,

another to supplement internal regulations, was to speed up the transfer of

securities. This Act, amended three times, once in 1967 and twice in 1970, was

consolidated into the 1975 Securities Industry Act.


Prior to 1970, these initiatives represented the only direct interference with

regulations affecting the securities industry throughout Australia. The situation

was to change dramatically from 1970. Following the market crash of the late

1960s and early 1970s, the Commonwealth government implemented two

major market reviews conducted by Parliamentary Select Committees

(subsequently known as the Rae Report and the Campbell Committee Report

after their respective chairmans). The Rae Report was charged:

       ...to inquire into and report upon the desirability and feasibility of
       establishing a securities and exchange commission by the
       Commonwealth either alone or in co-operation with the states and the
       powers and functions necessary for such a commission to enable it to
       act speedily and efficiently against manipulation of prices, insider
       trading and such other improper or injurious practices as the Committee
       finds have occurred or may occur in relation to shares and other
       securities of public companies, and to recommend generally in regard to
       the foregoing such legislative and administrative measures by the
       Commonwealth as will, having regard to the constitutional division of
       legislative power in Australia, enable the utmost protection of members
       of the public and the national interest (p.v).

After 167 meetings it released its findings in 1974. It made a series of specific

suggestions to improve what it considered to be doubtful and misleading

practices of investment advisers, journalists and securities traders. Referring to

its motivation the committee noted:

       ...the involvement of stock exchange members...in very large share
       trading for themselves or associated companies, made it hard to see
       how these members could advise and act for clients uninfluenced by
       concurrent considerations arising from their own positions as traders [p.
       15.9].




                                        15
                                Chapter 2. History



Notwithstanding that most of its recommendations in regard to market rigging

were ignored owing to the scant nature of the evidence they supplied, its major

recommendation, for the formation of a National Securities Commission to

overhaul the entire spectrum of security regulation, was implemented. Most of

the suggestions in this regard were taken up immediately in the Corporations

and Securities Industry Bill 1974 introduced to parliament by Attorney-General

Lionel Murphy. The Bill had clearly been in the process of construction while

the Senate committee was meeting, evident from its voluminous length. It

contained provisions calling for the setting up of a Corporations and Exchange

Commission to administer subsequent provisions of the Bill dealing with:

1.     Registration of corporations.

2.     Setting up of stock markets and exchanges.

3.     Dealing in securities.

4.     Disclosure by securities.

5.     Raising of money by public corporations through prospectuses.

6.     Investment corporations.

7.     Disclosure of substantial shareholdings.

8.     Takeovers.

The Bill which passed through the lower house became ideologically bogged in a

hostile Senate, and was subsequently shelved amidst the constitutional turmoil of

1975. In spite of this, it appears that the bi-partisan make-up of the Senate

Select Committee, many of whose recommendations the Bill sought to

implement, encouraged separate state legislative initiatives in four states, namely

New South Wales, Victoria, Queensland and Western Australia. Although

largely modelled on the Corporations and Securities Industry Bill, the state Acts

neglected the registration of corporations, disclosure by corporations, and the

raising of money by public corporations via prospectuses concentrating on:

1.     Setting up of stock markets and exchanges.


                                        16
                                 Chapter 2. History



2.      Licensing of brokers and investment advisors.

3.      The conduct of the securities markets.

4.      Accounts and audit.

5.      Registration of interests in securities.

6.      Deposits with stock exchanges.

7.      Fidelity funds.

8.      Trading in securities.

Each state Act was administered by a state corporate affairs office. As is

evident from above, the government had begun to take an active role in the

regulation of the securities market. Although the regulations dealt primarily

with internal regulations, government influence became even more pronounced

in 1978 when the National Companies and Securities Commission (NCSC) was

established. This body was introduced in the recognition that there were still a

great variety of practices with respect to security markets across the various

states even after the introduction of the State Acts. It was thought that such

diversity gave advantages to some corporations over others by the mere fact

that they coincidentally incorporated in separate states. The NCSC was given

control of the state corporate affairs offices at the same time that it was given

the responsibility of enforcing a federal Securities Industry Act. In December

1978 each of states assented to the federal parliament accepting responsibility

for the regulation of the securities industry, and the first consolidating federal

Act was passed in 1981. Although it corrected a number of obvious differences

in state regulation it did not take any more initiatives. Still in the control of the

stock exchanges (by this time the Australian Associated Stock Exchanges),

were a number of powers including the power to prescribe listing requirements,

to restrict entry to the broking profession and to fix brokerage rates.


These last two rights were short lived however as the federal government in

1974 had passed the Trade Practices Act which gave birth to the Trade



                                          17
                              Chapter 2. History



Practices Commission (TPC). The commission had been set up under the Act

to investigate the possibility of deregulating industry. Among the earliest

industries to be given new operating guidelines were the insurance and real

estate industries. In 1974 the TPC gave the stockbroking industry interim

authorisation of its rules subject to the commission securing time to look at the

industry in more depth. The TPC actually began this task in 1979 but once

again deferred investigation on an application from the AASE which claimed

that because of its commitments to supply information to the Campbell

Committee that it had not had time to review its own rules. These tactics

proved successful until June 1981 when the Australian Merchants Bankers'

Association (AMBA) took an unprecedented step. They went to the Federal

Court with a writ of mandamus, (an order requiring an officer of the Crown to

fulfill his statutory duty) in an attempt to force the TPC to turn its immediate

attention to the stockbroking industry. No doubt AMBA's case was

strengthened by the fact that the Campbell Committee Report, released in

1981, suggested immediate deregulation of both brokerage rates and entry

requirements, (issues which focused the TPC's attention on the stockbroking

industry in the first place) for without waiting for the outcome of the case the

TPC immediately turned its interest to the stockbroking industry, calling for

submissions from interested parties.


The TPC received fifty-two submissions from forty-six parties. The various

parties and their submission dates are listed in Attachment 2.5.5 The first and

most influential submission defending the status quo was received in May 1980

from the AASE. The AASE made further submissions in December 1981 and

April 1982. The primary submission was the second released by the AASE in

November 1981.


The AASE's case in favour of the status quo focused around three primary

arguments. First, that the Australian securities markets were sufficiently


                                        18
                               Chapter 2. History



different to the US securities markets so as to dispute AMBA's claims that

benefits accruing to the US marketplace from deregulation in May 1975 could

be expected in Australia. Further, that because of these differences,

deregulation rather than being benefitial, would most likely be harmful to the

Australian marketplace because it would lead to market fragmentation,

illiquidity and higher transaction costs for significant proportions of the

marketplace. Second, the AASE claimed that allowing banks to become

brokers would compromise the independence of the broking industry. Finally,

the AASE claimed that being under the guise of the Ministerial Council negated

AMBA's claim that the industry was an unfettered monopoly. Subsequently,

claims and counter claims were introduced by both parties.6 Interestingly,

however, no formal analysis has compared these claims against what actually

occurred following the TPC's decision to impose deregulation. In this

knowledge the current study finds a purpose - to provide an amount of

adjudication on the pre-April 1984 claims and counter claims of the proponents

and antagonists of deregulation. In consequence subsequent chapters test

whether:

1.     market concentration increased;

2.     market fragmentation occurred;

3.     the liquidity of the market declined;

4.     institutional clients benefited from deregulation at the expense of
       private clients;

5.     principal trading increased giving rise to problems of conflict of interest.




                                        19
                               Chapter 2. History



Deregulation in overseas environments

Prior to 1980, only one other country, the US, had tackled and resolved the issue
of deregulation. Canada was still in the process. In the following section a brief
description is given of the arguments presented for and against deregulation in the
US and Canada, and a series of results from the US experience are reviewed. In
spite of the fact that the structure and size of the securities markets of the US and
Australia are quite different, a review and comparison of Australian and US
arguments for and agianst deregulation shows remarkable similarity. In this context
these results provide a base from which to compare the Australian results
presented in subsequent chapters.

3.0 The US experience


The US securities industry since 1933 has been directed by the Securities and

Exchange Commission (SEC) acting under the jurisdiction of the Securities Act

1933, and the Securities Exchange Act 1934, Acts which arose from

circumstances surrounding the stock market crash of 1929. In a manner

paralleling regulatory intervention into the stockbroking industry in Australia,

US regulatory initiatives have focused primarily on the conduct of the market,

with specific emphasis being placed on eliminating fraud and manipulation as

well as encouraging full disclosure. Concentration on these external rules has

traditionally diminished the attention given to rules dealing with the internal

workings of the exchanges and/or the efficiency of brokers in conducting

security transfers. As a result the New York Stock Exchange (NYSE)

continued to self-regulate, largely unchallenged, until 1968 when, in the wake

of a submission to the SEC to raise its brokerage rates, the Department of

Justice intervened raising the question of why brokerage rates needed to be

fixed. The event set in motion a series of hearings and debates on the issue. The

NYSE, in defence of the fixed rate system (which had operated since 1792),

argued that in the absence of a fixed rate system markets would fail because:


1.     Economies of scale in brokerage firms and a fixed-to-variable cost ratio

       encouraging cut-throat competition would lead to monopolisation of

       the industry or its domination by a few large firms.




                                        20
                               Chapter 2. History



2.     Brokers unable to compete would leave the NYSE causing

       fragmentation of the market and a reduction in liquidity.


3.     On the unbundling of broking and research services, research services

       would decline causing an increase in the riskiness of investments. This

       would result from the free-rider problem where the first person to

       receive research services could resell the research at less than cost.


4.     Small investors would be pushed out of the market by the expected

       increase in brokerage fees they would have to sustain.


Those who argued against the fixed rate system, argued in essence that

competition would lead to lower prices and a higher level of output - that the

higher level of output would reverse any tendency for the market's liquidity to

fall. In respect of the survival of brokerage firms it was argued that only those

which were inefficient would fail and that any change in the price of services to

various sectors in the community, rather than disadvantaging them, would

reflect the true cost of the services they consume. Regarding market

fragmentation, it was argued that fragmentation would not result because lower

prices would encourage the channeling of transactions towards the NYSE.7 In

addition it was argued that through a recognised procedure known as "give-

ups" - a form of non-price competition in which commissions were

redistributed to third parties, for example, for computer or research services,

institutional clients were already operating in a competitive price environment,

even though the fixed structure was being nominally maintained.


Following a series of hearings and debates in which these arguments were

considered, the fixed brokerage system was abandoned on large transactions in

1968 and totally abandoned in May 1975.8 Since this date a number of studies

have investigated what actually happened. Prominent among these was the

investigation by the SEC in its 1979 and a work by Phillips and Zecher (1981).


                                        21
                                Chapter 2. History



The conclusions of these two reports bear out a number of fundamental points.

First, the NYSE's predictions of catastrophic changes to the market have

proved unfounded. Second, although institutional client rates dropped

appreciably by comparison to private client rates, the private client rates still

underwent a reduction. Phillips and Zecher (1981, 66) report that while

effective rates for institutions dropped by 43% for institutional clients they also

dropped 15% for private clients, a trend which stablised after a two-year

period. By this time institutional rates had fallen by nearly 60% from 1974 rates

with private rates falling by approximately 28%. The SEC reported that by

December 1977 rates for institutional and private clients had fallen by 16% and

46% (see Figure 2.1), respectively. Notwithstanding the differences (to be

explained by the more representative sample which the SEC had access to) the

advantages afforded by deregulation are apparent. Similarly favourable results

were presented with respect to the financial status of brokers. The 1979 Staff

Report of the SEC indicated that the industry as a whole achieved healthy

profits in 1975 through to 1979 after sustaining losses in the two years

immediately prior to deregulation (see Figure 2.2). While there appeared to be

some evidence of increased merger activity following deregulation, providing

some hint of increased market

                                     Figure 2.1

                                     Figure 2.2




                                         22
                              Chapter 2. History



concentration, the SEC reported a 7.5% increase in the market share of the ten

largest companies over the period May 1975 to December 1978. As oppossed

to attributing it to deregulation they suggested that this was more likely to be

the result of a trend which had been evident prior to deregulation. Further, that

the problem was diminished even further when it was disclosed that the

mobility in and out of the top ten companies had been extensive with

companies ranked as low as twenty-six in 1972 being in the top ten in 1978.

Although the effect on research services did not come in for scrutiny it would

appear that the US effort to deregulate brokerage commissions was a triumph

for free market forces. Since the US initiative similar initiatives has been

undertaken in both Canada and Australia.


The Canadian experience


Unlike the US, there is no equivalent of the SEC in Canada. Security

commissions which do exist have jurisdiction at the provincial and not the

national level. Prominent among these commissions is the Ontario Securities

Commission (OSC) which in 1967 had its sphere of influence widened to

include overseeing the operations of the Toronto Stock Exchange, one of the

largest in Canada and on a par with the NYSE in terms of its market share.


Immediately it was granted this power it set in motion a series of public

meetings to review the commission rate structure. Its announced criteria for

judging the appropriateness of rates was the same as the SEC had started with,

namely, the criterion of "reasonableness". However, as Potter (1982) notes:

       Despite a number of hearings in the late 1960s and early 1970s, it could
       not formulate an adequate measure of "reasonableness" [because it had]
       been unable to use revenue and cost data to manage the
       competitiveness of the brokerage rate structure and to adopt that
       structure to rapid structural changes in the industry [p.18].9

Following the American initiative of May 1975 the OSC called Hearings for

May 1976, inviting all interested parties to give their views. At issue was not


                                        23
                               Chapter 2. History



the "reasonableness" of rates but whether they should be made fully

competitive. The result was a four to two vote by the commission in favour of

maintaining the fixed rate system. It was clear however that their decision had

been extremely tentative. Referring to the decision Connelly wrote:

       ...the continuation of fixed rates could hardly have been more tentative,
       the decision provoked an unprecedented published dissent from two of
       the six commissioners, and a third commissioner, the veteran vice-
       chairman Mr. Bray, was reported in the majority opinion to be of the
       view that negotiated rates must come eventually (1979, 245).

The decision looked even more out of step with public feeling when in April

1977, after similar hearings, the Quebec Securities Commission announced in a

letter to the Montreal Stock Exchange that it was recommending that the

provincial government pass legislation completely deregulating fixed

commission rates.


After two further rate hearings in 1977 and 1981 in which the TSE had gained

OSC approval for substantially reduced rates of brokerage on large transactions

(to compete with the US market) at the expense of small transactions, it

appears to have become clear to the OSC that fully competitive rates were

inevitable. The TSE raised the same objections to price unfixing as had the

NYSE, including the possibility of market fragmentation, increased market

concentration and increased brokerage rates for the retail investor.10 However

in view of the fact that in order to compete with the US market it had itself to

raise these rates the point seemed lost. Faced with their staff submission11

which constituted a rebuttal of the TSE submission the OSC acquiesced to

negotiated rates concluding:

       ...on all the evidence, ... we can no longer continue to sanction a
       practice, no matter how long it has been in existence, which is contrary
       to the aspects of the public interest identified in section 32 of the
       Combines Investigation Act, as amended . After reading our conclusion
       we consulted our colleagues in the other provinces and learned that
       Quebec has independently reached the conclusion that the Montreal
       Exchange should repeal its regulated fixed minimum commission by-
       laws, on the basis of the hearings held by it. We have agreed that each
       of our independently determined orders should become effective at the

                                       24
                                 Chapter 2. History



        start of business on April 1, 1983 and that the commissions charged by
        brokers in Ontario for transactions effected through the TSE should be
        a matter of arrangement between the broker and its client.12

To date no detailed investigation (similar to that conducted in the US) has

probed the effects of deregulation in the Canadian securities environment.

Similarly no such study has been undertaken in Australia. This study redresses

the situation in Australia.


4.0 Summary and conclusions


From its beginnings in the mid-nineteenth century until the early 1980s the

Australian securities industry operated as an effective cartel. Rules adopted

from its UK counterparts set up barriers to entry and mandated a schedule of

fixed brokerage fees. Although similar rules initially precluded brokers from

principal dealing and jobbers from agency trading, a unique feature of the

Australian industry was that these later rules were quickly overturned.


Leaving aside this difference, the Australian industry operated in similar fashion

to the US industry before it was deregulated. Rather than being subject to the

discipline of competition it was subject to irregular regulatory initiatives of

government. However, on 1 April 1984, this situation changed. Reacting to

pressure from AMBA the TPC ruled in favour of deregulation. This brought to

an end seven years of debate between the AASE and opposing groups. The

impact(s) of this change on trading arrangements and parties both inside and

outside the securities industry is the subject of this thesis.




                                          25
                                Chapter 2. History



Notes

1.      See Hall (1968, 29) for a discussion of this case.

2.      See Hall (1968, 23)

3.      Initially this organisation consisted of the Melbourne and Sydney
        exchanges alone, a fact which is perhaps not surprising given the
        identical nature of their listing requirements as early as 1936.

4.      See Law of Companies in Australia, Commerce Clearing House, North
        Ryde, NSW, 1986, p.351.

5.      These individual submissions are held by the author and are available to
        the interested reader.

6.      For a more detailed description of these arguments see Chapter 3.

7.      The NYSE in turn argued that the demand for transactions was price
        inelastic and as a result the above argument would not hold water.

8.      For a more detailed discussion of the circumstances surrounding
        deregulation see Philips and Zecher (1981, 57-60).

9.      For a more detailed discussion of the circumstances surrounding
        Canadian moves to deregulate see Potter (1982) and Connelly (1977).

10.     See Potter (1982,40).

11.     Submission to the Ontario Securities Commission Respecting the
        Unfixing of Commission Rates, OSC Staff, November 1981.

12.     OSC Bulletin, 15 June, 1982, p. 150C.




                                        26
                             Chapter 2. History



                              Attachment 2.1


Original rules and regulations of the "The Stock Exchange" of Melbourne


CONSTITUTION

1.    This association shall consists of brokers and jobbers in stock and
      shares. The room or place in which the association shall from time to
      time hold its meetings shall be called "The Stock Exchange" of
      melbourne.

2.    Subscribers will also be admitted, according to the scale of fees adopted
      by the committee, but not to have any voice in the constitution or
      management.

THE COMMITTEE

3.    The management of the exchange shall be entrusted to a committee of
      seven members to be called the "Committee for General Purposes," to
      be elected by ballot on the first Monday in each quarter, who shall
      continue in office for three months. Every committee-man shall be re-
      eligible. No two members of a firm shall be members of the Committee.

4.    The committee for general purposes - of whom five shall form the
      quorum - shall have the sole management, regulation, and direction of
      all the concerns of the said exchange, and in all cases brought under the
      consideration of the Ccmmittee, their decision shall be final, and must
      be forthwith carried out by every member concerned therein.

5.    At any election of members to serve on the committee, every broker
      and jobber, is eligible as a candidate and is entitled to vote.

6.    When a vacancy occurs in committee, one week's notice of the filling of
      such vacancy shall be posted in the exchange, and the ballot box shall
      be open for one hour.

7.    At the first ordinary meeting after the quarterly election of the
      committee, the members of committee shall elect from among
      themselves, a chairman who shall hold his office till the quarterly
      meeting next ensuing. When the chairman is not present, the meeting
      shall appoint a chairman, and in all cases when on a division the votes
      shall be equal, the chairman shall have a second or casting vote. The
      chairman of committee shall also be chairman of the House during his
      tenure of office.

8.    At the first meeting of the committee, one of the members of the stock
      exchange shall be appointed Secretary, who shall hold his office during
      their pleasure.

9.    A special meeting of the committee may at any time be called by the
      chairman, or in his absence, or in case of his refusal, by any two
      members of the committee. But one day's notice, at least, shall be given
      to the members of committee. The committee to have power to adjourn
      from day to day in case of a quorum not being present.


                                      27
                             Chapter 2. History



10.   Notice shall be given in writing for any alteration of the laws at one
      meeting of the committee, to be taken into consideration at the next or
      subsequent meeting. A copy of such alteration of a law, or proposed
      new law shall be accessible to each member of the committee, when
      summoned to take such matter into consideration.

11.   All communications to the committee shall be made in writing, but no
      anonymous letter shall be acted upon.

12.   The committee will not consider themselves called upon to entertain
      any question submitted to them by any one not a member of the stock
      exchange, against a member of it, unless such member shall have been
      employed by the complainant in the capacity of a broker; and in that, or
      in any other case, in which a non-member requires the intervention of
      the committee, he shall previously to the case being heard, undertake to
      abide by, and forthwith to carry out the decision of the committee in the
      same manner as if he were member of the stock exchange.

13.   Every member of the stock exchange, and every clerk to a member,
      shall attend the Committee for general purposes, when required: and
      shall give the committee such information as may be in his possession or
      control relative to any matter then under investigation.

14.   The committee have the right to expel or suspend any member of the
      stock exchange who may be guilty of dishonourable or disgraceful
      conduct, or who may violate any of its regulations, or fail to comply
      with any of the committee's decisions; but no expulsion or suspension
      shall take place, except by the committee being summoned for the
      express object of considering such measure, an absolute majority of
      which must concur in its adoption.

15.   The committee have power to inflict fines not exceeding £5 for
      infringement of rules where special penalties are not provided. All fines
      to go to the general funds of the stock exchange.

ADMISSIONS

16.   The committee for general purposes shall admit such persons as they
      shall deem eligible to be members of the stock exchange at the
      respective rates fixed.

17.   Each individual of a partnership is required to sign a separate
      application for admission.

18.   Every new applicant for admission must be recommended by three
      members of the stock exchange. The following shall be the form of
      application:

      To the Chairman of Committee of the Stock Exchange

      Sir, - I am desirous of becoming a member of the stock exchange as a *
      , under such rules and regulations as you have adopted, or may in future
      adopt; and I hereby agree to pay my Entrance Fee and annual
      subscription on election.

      My residence is:

      My bank is:

                                      28
                              Chapter 2. History



      My references are:

      I am, Sir, your obedient Servant,

      * Here state broker, jobber, or subscriber.

      The following is to be printed on the back of the letters of application; -

      When the creditors of a defaulter shall represent to the committee for
      general purposes, or when it shall otherwise appear to the committee,
      that his conduct has been dishonourable, the committee have the right
      to cause the name of such defaulter to be fixed on the black board in the
      stock exchange.

19.   A notice of each application, with the names of the recommenders shall
      be affixed in the stock exchange at least seven days before the applicant
      can be balloted for.

20.   The chairman of committee shall have the power of questioning the
      recommenders of an applicant as to his fitness to be elected.

21.   In balloting for members in committee two black balls shall exclude.

22.   If any applicant for admission or re-election, shall, on ballot, be
      rejected, such rejection shall be conclusive for three months.

23.   All brokers, jobbers and subscribers shall sign an undertaking to abide
      by the existing and any future rules and regulations of the stock
      exchange.

24.   Any member requiring the admission of a clerk shall address a letter to
      the chairman, as per form annexed, and on payment of 3 guineas per
      annum in addition to his usual subscription, such applicant shall, during
      the pleasure of the committee, be entitled to that privilege.

      Form of Letter

      To the Chairman of the Stock Exchange Melbourne

      Sir, - I have to request permission for the attendance of my clerk,
      ______________________, on the stock exchange, whom I hereby
      authorise to transact business on my account, and I agree that this
      authority shall continue until revoked by a letter addressed to you.

      I am, & C.

25.   No clerk shall enter the stock exchange until the member employing
      him has received intimation from the secretary that his admission has
      been allowed by the committee.

26.   Clerks of defaulters are excluded with their employers.

FUNCTIONS OF BROKERS, JOBBERS AND SUBSCRIBERS

27.   Brokers may lend money on stock and shares, and hold the same as
      security in their own names.



                                       29
                             Chapter 2. History



28.   Brokers are prohibited from buying shares entrusted to them for sale, or
      from selling shares from their own property to fill orders entrusted to
      them, without such being a matter of arrangement with the client
      interested. Cases of unfair dealing to the dealt with under Law 14.

29.   Subscribers and jobbers shall confine themselves strictly to acting as
      jobbers or dealers and transact all their business of buying or selling
      stock or shares through the brokers members of the stock exchange.

30.   The committee will not sanction partnerships between a broker in the
      stock exchange and a dealer in stocks and shares: nor will they allow
      the authorised clerks of brokers to act as dealers in the stock exchange.

31.   In all contracts between brokers, unless the principals be exchanged at
      the time of making the bargain, and inserted in the written contract, the
      brokers shall be held as principals to each other.

32.   No broker, jobber or subscriber shall transact business with any broker
      other than those who are members of the exchange, except as
      principals.

STOCK AND SHARES

33.   Should a member selling not complete his transaction within four days
      from date of sale, it shall be optional with the buyer to refuse such
      shares absolutely, and to compel the seller to pay the difference in price
      (if any) in cash.

34.   Stock or shares not taken within four days from date of sale may be
      resold at the risk of the purchaser, but always publicly through another
      broker.

35.   A member who allows three days to elapse beyond the time named,
      without availing himself of the right of buying in or selling out, shall be
      considered to have released the buyer or seller from all responsibility.

36.   Buying in or selling out stock shares, or other securities, must be
      effected through the medium of a broker who is a member of the stock
      exchange.

37.   When stock or other securities are sold for cash, payment may be
      demanded upon delivery of the securities. All transactions when no
      other terms are named shall be assumed to be for cash.

38.   Transfers of stock and shares not fully paid up shall, if required by the
      seller, have the name of the purchaser inserted, and be duly lodged.

39.   The seller of shares or stock is responsible for the genuineness and
      regularity of all documents delivered, until fair and reasonable time has
      been allowed to the buyer to execute and duly lodge such documents
      for verification and registry in the books of the respective companies.

40.   An offer to buy or sell an amount of shares or stock at a price named, is
      binding as to any part thereof, provided that such part be a marketable
      quantity; and an offer to buy or sell Shares or stock when no amount is
      named is binding to the amount of £50 worth, or 100 shares, should
      their aggregate value not reach £50.


                                       30
                              Chapter 2. History



41.    The seller is authorised to pay any call made on shares sold, although
       such call is not due, and to claim the same of the purchaser.

42.    Purchasers of stock or shares may refuse to pay for a transfer
       unaccompanied by certificates, unless it be certified officially that the
       said certificates are at the office of the company. But if the transfer
       presented to perfect in all other respects, the stock or shares must not
       be bought in until reasonable time has been allowed to the seller to
       obtain from the office the verification required.

43.    No person shall be required to pay the same day for shares or stock
       presented after half-past two o'clock, or on saturdays after half-past
       eleven o'clock.

44.    In case of delay in payment, or other default of completion of a bargain
       being brought before the committee, the committee shall have the
       power of imposing a fine not exceeding £5, as well as of treating the
       member complained of as a defaulter.

45.    A member who may become insolvent, or otherwise fail in his
       engagements with his creditors, ceases to be a member, although he
       may not be at the same a defaulter in the stock exchange, and the
       committee will not entertain any application for his re- admission except
       as a new member.

46.    A member unable to fulfill his engagements, shall have his name posted
       up as a defaulter by direction of the committee.

47.    A person declared to be a defaulter ceases immediately to be a member.

48.    Every defaulter or insolvent applying for re-admission shall furnish the
       committee with every information they may require.
      MISSIONS

       The scale of Brokerage shall be:

       On shares sold for £5 per share, and upwards, 1 %.

       On shares sold for between £1 and £5 per share, 1/- per share.

       On shares sold for less than £1 per share, 6d. per share.
       On debentures, one half per cent.

       On mining shares sold at, or over, £20 per share, 2.5 %.

       When a brokerage at above rates would not amount to 10/-, that sum will
       be charged.

              The foregoing rates apply to bank, gas, insurance, railway, mining
       and other shares.

50.    Brokers selling shall allow one half their commission to brokers or
       jobbers, members of the exchange, buying of them, but not to
       subscribers.

51.    Jobbers selling shall pay their brokers the full rate of commission.

                                        31
                              Chapter 2. History



52.   Any broker charging more or less than the authorised rate of
      commission shall be subject to a fine of £20, and shall be liable to
      expulsion.

QUOTATIONS

53.   A list of prices of shares and other securities shall be collected and
      published under the authority of the committee; and no securities shall
      be inserted in that list, nor shall any list be published or sold by any
      member of the stock exchange, but under the sanction of the
      committee, and bearing a statement thereon to that effect.

54.   No price of shares or other securities shall be inserted in the said list,
      unless one of the parties to the bargain be a member of the stock
      exchange; not on the authority of that one, if such person refuse when
      required by the committee to give up the name of the other party
      thereto.

55.   No price inserted in the authorised list shall be expunged without the
      authority of the chairman or two members of the committee.

56.   The committee shall decide what companies may be quoted in the
      official list.

HOURS OF BUSINESS, ETC.

57.   The hours of business in the stock exchange are from 11 till 4 o'clock,
      except on saturdays, when business will close at 12 o'clock, noon.

58.   The closing prices shall be made up each day at 3 o'clock p.m.
      precisely, and on Saturday at 11 o'clock a.m. One quarter of an hour
      after the secretary has announced that the closing prices are made up,
      the room shall be cleared.

59.   A list of the members of the stock exchange, distinguishing brokers,
      jobbers, and subscribers, shall be kept accessible to all members of the
      exchange.

ENTRANCE FEE AND SUBSCRIPTION

60.   The rate of entrance fee and annual subscription shall be as follows:-

      Brokers' and Jobbers' entrance fee, 10 guineas; annual subscription, 5
      guineas.

      Subscribers' entrance fee, 2 guineas; annual subscription, 2 guineas.

      Clerks' entrance fee, nil: annual subscription, 3 guineas.

61.   Every member who shall allow his subscription to be one month in
      arrear, forfeits all privilege of membership, and will have to be re-
      elected, and go through the same form as a new applicant.

TRUSTEES

62.   The funds of the stock exchange shall be deposited in names of three
      trustees, to be elected annually by brokers,jobbers, and subscribers.


                                       32
                           Chapter 2. History



63.   All accounts shall be paid by cheque signed by two out of the three
      trustees, on a warrant signed by chairman of committee for the time
      being, and the Secretary.




                                   33
                               Chapter 2. History




                                Attachment 2.2

      Original rules and regulations of the Melbourne Stock Exchange

Rules and regulations

1.      This Association shall consist of the undersigned stock and share
        brokers, and of such other persons as may be hereafter elected in
        accordance with rules 10 and 11, and shall be called the "Melbourne
        Stock Exchange".

2.      The management of the association shall be vested in a committee of
        the whole, seven to form a quorum, and such committee shall have
        direction and control of the affairs of the exchange.

3.      The association shall hold its daily meetings at such place and times as
        may be agreed upon.

4.      From time to time a chairman and vice-chairman shall be appointed by
        the committee.

5.      An honorary secretary shall be appointed at the first meeting of the
        exchange, who shall hold office at the pleasure of the committee, and
        shall have charge of the funds of the association, in conjunction with the
        chairman or vice-chairman.

6.      The committee shall have power to make such by-laws from time to
        time as may be required for carrying on the business of the exchange.

7.      Notice of any proposed alteration of, or addition to these rules, shall be
        given in writing at one meeting of the committee, and be considered and
        determined on the seventh day thereafter.

8.      In any dispute arising between members in their dealings with each
        other, the matter shall be referred to and determined by the committee;
        and any member who shall refuse to abide by the decision of the
        majority of the committee, or shall violate any of the rules or
        regulations or of the association, shall cease forthwith to be a member.

9.      The committee shall have the right to suspend or expel any member
        who may be guilty of dishonourable, disgraceful, or otherwise
        objectionable conduct; but no expulsion or suspension shall take place
        except at a meeting of the committee, summoned for the express object
        of considering such measure. Three-fourths of the committee shall
        concur in any decision with regard to suspension or expulsion. The
        members of the Melbourne Stock Exchange hereby undertake that they
        shall not, in any case arising out of this regulation, raise any suit in
        equity or at law with reference to the grounds or effects of any decision
        of the committee, notwithstanding any irregularity or informality in its
        proceedings.

10.     The members shall admit, by ballot, such persons as they deem eligible,
        at the respective rates of entrance and subscription fees fixed by rule 15.
        A notice of each application shall be exhibited in the stock exchange
        during at least seven days before the applicant can be balloted for.


                                         34
                             Chapter 2. History



      Every applicant for admission must address and sign a letter in the
      following form:

"To the Chairman of the Melbourne Stock Exchange.

      Sir, - I am desirous of becoming a member of the Melbourne Stock
      Exchange, under such rules and regulations as you have adopted; and I
      hereby agree to pay my entrance fee on election, and annual
      subscription, or other contributions, when required; and I also agree, in
      case my conduct shall at any time be considered objectionable by the
      members of the exchange, that I will not, in the event of my being
      suspended or expelled, raise any suit in equity or at law against any
      member or members of the exchange.

      I am, Sir, &C."

11.   In balloting for members, one black ball in five shall exclude.

12.   If an applicant for admission or re-election should, on ballot, be
      rejected, such rejection shall be conclusive for six months.

13.   All members shall, immediately after election; and before attending any
      meeting of the Exchange, sign a copy of these rules and regulations,
      and shall thereafter be held to be bound thereby.

14.   Any member resigning or being expelled, shall cease to have any claim
      whatever on the property or funds of the exchange.

15.   The entrance fee payable by members shall be 10 guineas, and the
      annual subscription 5 guineas, payable quarterly in advance.

16.   In all contracts between members they shall be held to be principals to
      each other.

17.   Three clear days shall be allowed for delivery of documents by the
      seller, and failing delivery thereof during that period, the buyer having
      on the third day given twenty-four hours' written notice to the seller,
      may either cancel the purchase or buy at the risk of the seller, through
      any member of the exchange.

18.   Purchasers shall not be required to take delivery of and pay for
      securities tendered after eleven o'clock on saturdays, and one o'clock on
      other days.

19.   Sellers shall have the right to require the purchase money to be paid at
      the time and place of delivery of documents.

20.   In offering to buy or sell at the meetings of the exchange, the minimum
      amount shall be £50 or 100 shares, unless the value or number is
      specially stated.

21.   A member who may become insolvent, or otherwise fail in his
      engagements with his creditors, cease to be a member, although he may
      not be at the same time a defaulter on the stock exchange, and no
      application for his re-admission, except as a new member, will be
      entertained.



                                       35
                             Chapter 2. History



22.   The brokerage chargeable for selling government stock, debentures,
      shares, &c., other than mining shall be as follows: On Victoria 4%
      inscribed stock, 0.5% by selling broker, 0.5% by buying broker. On
      debentures of every description, 0.5%. On shares other than mining
      sold up to 10/- per share, inclusive, 3d. per share; sold over 10/-. and
      up to 15/-., inclusive, 4d. per share; sold over 15/- and up to 39/-.,
      inclusive, 6d. per share; sold over 39/-. and up to £5, inclusive, 1s. per
      share; sold over £5, 1%; brokerage divisible equally between selling and
      buying brokers. On mining shares, the brokerage for buying or selling
      shall not exceed the following rates: Sold up to 10/- per share,
      inclusive, 3d. per share; sold over 10/- and up to 30/-, inclusive, 6d. per
      share; sold over 30/- and up to 40/-, inclusive, 1/- per share; sold over
      40/-, 2.5%; a minimum charge of 10/- may be made on any transaction.
      On the floating of loans, or of any public companies, brokerage as per
      arrangement with promoters.




                                       36
                             Chapter 2. History



                              Attachment 2.3

Chronological list of Victorian securities industry legislation with library
      references (University of New South Wales)

ACTS OF THE VICTORIAN STATE PARLIAMENT:

1.     Stock and Share Brokers Act (1937) No.4510

       L/KH 145/VI (1937) p.145

2.     Stock and Share Brokers Act (1958) No.6381

       L/KH 144/F58 (1968) p.69

3.     Stock and Share Brokers (Amendment) Act (1966) No.7444

       L/KH 145/VI (1966) p.349

4.     Marketable Securities Act (1967) No.7570

       L/KH 145/VI (1967) p.282

5.     Securities Industry Act (1970) No.7962

       L/KH 145/VI (1970) p.114

6.     Marketable Securities Act (1970) No.7970

       L/KH 145/VI (1970) p.192

7.     Marketable Securities (Amendment) Act (1970) No.8038

       L/KH 145/VI (1970) p.505

8.     Securities Industry (Amendment) Act (1970) No.8059

       L/KH 145/VI (1970) p.690

9.     Securities Industry Act (1975) No.8788

       L/KH 145/VI (1975) p.947

10.    Securities Industry (Amendment) Act (1978) No.9170

       L/KH 145/VI (1978) p.450

11.    Securities Industry (Application of Laws) (1981) No.9562

       L/KH 145/VI (1981) p.278

ADOPTED COMMONWEALTH LEGISLATION:

1.     Securities Industry Code (Victoria)

       L/KH 145/VI (1981) p.2092



                                      37
                           Chapter 2. History



2.   Securities    Industry      (Interpretation   and   Miscellaneous
     Provisions)(Victoria) Code.

     L/KH 145/VI (1981) p.2215




                                    38
                                            Attachment 2.3(a)

                                VICTORIAN SECURITIES INDUSTRY LEGISLATION
         Amending legislation                                       Consolidating legislation

                                                                    Stock and Share Brokers Act No. 4510
                                                                    Stock and Share Brokers Act No. 6381

Stock and Sharebrokers(Amendment)Act
               No.7444                                               Marketable Securities Act No.7570
                                                                       Securities Industry Act No.7962

                                                                     Marketable Securities Act No.7970
Marketable Securities (Amendment) Act
                No.8038
 Securities Industry (Amendment) Act
                No.8059
                                                                       Securities Industry Act No.8788
 Securities Industry (Amendment) Act
                 No.9170
Securities Industry (Application of Laws)
              Act No.9562
                                                                      Securities Industry Code(Victoria)
 Securities Industry (Interpretation and
Miscellaneous Provision) (Victoria) Code




                                               39
                                    Attachment 2.4

           Original rules and regulations of the Sydney Stock Exchange

1.    The association of stockbrokers shall be called "The Sydney Stock Exchange".

2.    The undermentioned stock and sharebrokers shall be the first members.

3.    An entrance fee of £5 and 5/-. shall be paid by each member.

4.    A meeting of members shall be held daily, (saturday expected,) at such hour and
      place as the committee shall appoint.

5.    The following shall be the rates of charge for brokerage, namely:-

      On all shares in incorporated or registered companies, on which the consideration
      paid is over 25/-. per share,brokerage, 1%.

      On all shares on which the consideration paid is 25/- per share or under,
      brokerage, 3d. each share.

      On all other share interests, minimum brokerage, 2.5%.

      On debentures and treasury bills, 0.5%.

      The purchaser to pay stamp duty and transfer fees.

6.    The present members are appointed a standing committee for general purposes.

7.    The official list of quotations of current securities shall be revised at the daily
      meetings of members and posted for public inspection.

8.    Any share-broker seeking admission to the association must be proposed by a
      member, and his name submitted with the name of his proposer to the standing
      committee fourteen days at the least before the day of election: and all candidates
      must deposit the entrance fee upon nomination for election as members.

9.    The election of a newmMember shall be carried only at a special meeting of the
      standing committee called for that purpose, by a majority of at least two-thirds of
      the committee present, - five to form a quorum.

10.   The mode of election of a candidate for membership shall be by ballot as follows,
      namely:

      Two slips of paper shall be handed round to each member of committee present,
      with the word "Aye" upon one, and the word "No" upon the other. One of these
      slips shall be handed in to the chairman, who, assisted by two scrutineers, shall
      proceed to examine the papers, and immediately afterwards report the result of the
      ballot.

11.   The settling for shares and other securities as regards the public shall be made:

      (a)With purchasers at the time of delivery of the contract note unless otherwise
      agreed.




                                      40
      (b)With sellers on the day next after the first board day of the company when the
      transfer has been, or may be assumed to have been passed, and for debentures on
      delivery of the securities.

12.   The settling as between members shall be made within twenty-four hours of the
      delivery of transfers, unless otherwise agreed.

13.   At members' meetings, business between members shall not be obstructed by any
      personal differences that may have arisen outside the house.

14.   Any member found by the committee to have been guilty of default or of conduct
      unbecoming a member, shall forfeit has membership and cease to be a member.

15.   The continued absence of a member from members' daily meetings, for the period
      of one calendar month, without leave allowed by the committee, shall be deemed
      and taken to be a vacating of membership; and no Member, so absent, shall be
      restored to membership, unless by order of the committee, after an explanation
      rendered to them and considered satisfactory.

16.   The honorary secretary shall act as treasurer.

17.   The foregoing rules of the "Sydney Stock Exchange", are approved and adopted.




                                      41
                                      Attachment 2.5

     List of parties who made a submission to the TPC with reference to the AASE's
                         application for authorisation of its rules.

                                                             Date Received by TPC

Australian Associated Stock Exchanges                                   29.5.80

                                                                       16.12.81

                                                                        15.4.82

Australian Merchant Bankers Association                                 24.6.81

                                                                         2.3.82

National Companies and Securities Commission

                                                              (Volume1) 7.6.82

Ord Minnett (brokers)                                                  26.10.81

                                                                       11.11.81

                                                                        20.4.82

Potter Partners (brokers)                                               9.11.81

                                                                        10.2.82

McCaughan Dyson and Co (brokers)                                       27.11.81

McIntosh Griffin Hamson & Co (brokers)                                  1.10.81

Valder Elmslie & Company (brokers)                                       8.9.81

A.C.Goode & Co (brokers)                                                9.11.81

Meares & Philips (brokers)                                             11.11.81

Charles Schwab & Co (U.S. discount brokers)                             3.11.81

                                                                        15.2.82

London Stock Exchange                                                  27.10.81

BT Australia Ltd (merchant bank)                                       20.11.81

Bancorp Holdings Pty Ltd (merchant bank)                               15.10.81

Australian Shareholders Association                                     5.11.81

Life Insurance Federation of Australia                                 20.11.81




                                         42
Name of Party Providing Submission                           Date Received

The Association of Superannuation Funds of Australia              18.11.81

Brisbane Chamber of Commerce                                        5.4.82

The Australian Association of Investment Managers                 27.11.81

National trustees Executors & Agency Co of Australasia Ltd         14.9.81

Perpetual trustees Australia Ltd                                   25.9.81

Mutual Life & Citizens' Assurance Company Ltd.                    30.09.81

M.I.M. Holdings Limited                                             5.4.82

David Block & Associates Pty Ltd                                   14.8.81

Alkoomi Pty Ltd                                                    10.8.81

C.M. Abbott Pty Ltd                                                5.11.81

Milton Corporation Ltd                                             9.10.81

Gordon Moffatt                                                     30.9.81

Giles, Margarey & Lloyd(barristers and solicitors)4.8.81

Mr. R.J. Bailey(General Manager, Potter Partners)                 16.10.81

Miss Betty Moore                                                   14.9.81

Mr. R.K. Warren                                                    30.6.80

Mr. A.G.L. Shaw                                                    29.7.81

Mr. B.J. Tiernan                                                   29.7.81

Mr. B. Haran                                                       30.7.81

Mr. J.G. Riley                                                      3.8.81

Mr. J.B. Drill                                                     24.8.81

Mr. W.N. Powell                                                    17.8.81

Mr. R.O. Johnson                                                   13.8.81

Mr. A.R. Howarth                                                   13.8.81

Mr. J. Phair                                                       12.8.81

Mr. Claude S. Healy                                                12.8.81

Mr. A.J. Jackman                                                   31.8.81




                                       43
Name of Party Providing Submission                        Date Received

Mr. Arthur O. Gyles                                             18.9.81

Mr. J.M. Schaefer(Securities Industry Association, USA)          7.1.82




                                     44