Opening the Club

Stock exchanges are tightly knit clubs, and hardly anything has agitated their members more than the question of whether to let in the managers of mutual funds, pension funds, insurance companies and bank trust departments. By forming or buying brokerage subsidiaries that could trade on the exchanges, these institutional investors could save tens of millions of dollars every year in commissions. Many old-line brokers fiercely opposed institutional membership out of fear that they would lose commissions. Last week the Securities and Exchange Commission came out with a curious compromise: it ordered the exchanges to admit the institutions-but under conditions so restrictive that many of them may not want, or be able, to join.

The SEC decreed that brokerage affiliates of most investment institutions can join exchanges only if they do 80% or more of their business directly with the public and a mere 20% for their parent organization. If the brokerage subsidiary of a mutual fund expects to trade, say, $20 million worth of stock for the fund every year, it could join an exchange only if it could scare up another $80 million of business from outsiders.

First Time. Theoretically, the SEC action is of major importance. It marks the first time that the Government agency has told the exchanges whom they can and cannot admit. But in practice it probably will mean little to the ordinary investor. Possibly some mutual-fund salesman may offer to handle the investor's trades as well as try to sell him shares in the fund. But the biggest institutions have little chance of generating a public brokerage volume four times as large as their own trades, and thus would have to continue funneling most of the fund transactions through outside brokers. Accordingly, they could not save enough on commissions to make significant reductions in the fees that they charge to buyers of mutual-fund shares.

The controversy is unlikely to end with the SEC ruling. Some influential Congressmen are annoyed with outgoing SEC Chairman William J. Casey for acting without their prior approval. Democratic Senator Harrison Williams of New Jersey has offered a bill that would ban institutions that join exchanges from executing any trades at all for their own funds-but only if the exchanges agreed to accept negotiated, nonfixed commissions on any trades worth more than $100,000. That way, brokers now on exchanges would be forced into sharp new bargaining with their biggest customers, and institutions probably could get commissions lowered enough to offer significant savings to the buyer of mutual-fund shares or the holder of rights in a pension fund.

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