Buying a Share of the Broker

WALL STREET A young and fast-rising brokerage house, in a hurry to expand even faster, is forcing the New York Stock Exchange to resolve what has long been a Wall Street dispute. Should brokerage firms be allowed to sell their own stock to the public, thereby letting the ordinary investor in on Wall Street's enormously profitable business?

The exchange's constitution effectively forbids this by requiring that every stockholder in a member firm be approved by the Big Board's governors. Managers of some of the largest brokerage houses, notably Merrill Lynch, have yearned to go public in order to raise capital, but none of then did anything. Then last week the firm of Donaldson, Lufkin & Jenrette filed with the Securities and Exchange Commission to sell 800,000 shares, for about $30 each, to anybody who wants to buy.

Sending Clients Away. Donaldson, Lufkin is forcing the issue because lately it has had to turn down business from institutions that wanted to sell big blocks of stock. In order to accommodate them, the firm would have had to buy some of the shares itself, and it did not have enough capital to do so. Executives of Donaldson, Lufkin see this lack as a threat to the firm's spectacular record. Its revenues and profits have multiplied seven times in the past five years, and it has consistently earned a pre-tax return of almost 50% on gross revenues. Last year its profits before taxes were $14.9 million on a gross of $30.4 million.

"Retail" houses that service small investors--which Donaldson, Lufkin does not--also need more capital. They could use it to automate their back offices and clean up the paperwork mess that since January has forced the stock exchange to close daily trading 90 minutes early. The Big Board has asked the SEC to permit brokerage firms to sell bonds to the public, but Donaldson, Lufkin preferred to sell stocks rather than have to pay 9% or more interest on debentures. Its position has obvious support. When two Donaldson, Lufkin floor traders walked into a club for lunch the day after the filing, they got a standing ovation from fellow brokers.

Looking for Safeguards. Exchange President Robert Haack and executives of many smaller firms are cool to the stock-offering plan. They fear that any big mutual fund might win an unfair advantage over competitors by buying controlling interest in a brokerage house, putting all orders through that house and paying commissions mostly to itself. Public ownership could also help the rich firms get richer at the expense of small houses, which might not be able to sell their stock so easily. Most important, the SEC presumably would have to devise some safeguards to prevent manipulators or even Mafia hoods from gaining control of a brokerage house.

Dan W. Lufkin, the 37-year-old chairman of Donaldson, Lufkin and a Big Board governor, is pressing the other 32 governors to approve a change in the constitution, which would then have to be voted on by the 1,366 exchange-seat holders. The exchange has called for a committee report by July 17, and will seek the SEC's opinion. Lufkin does not intend to be put off. His firm's prospectus declares bluntly that if the constitution is not amended, Donaldson, Lufkin will go public anyway. If the stock exchange then drops it from membership, the firm seems prepared to risk the short-term loss of the 63% of its revenue that comes from commissions on Big Board trades. It would hope to make that up by using regional and other markets, where most of the Big Board stocks are also traded. If Donaldson, Lufkin succeeded, that would raise another question: who needs the New York Stock Exchange?

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