The Dreyfus Affair

An argument has long smoldered in Wall Street over the tight rules that restrict membership in the clubby New York Stock Exchange. Mutual funds, insurance companies and other institutional investors cannot join. Naturally they are resentful because they 1) account for well over half the trading volume on the exchange, and 2) pay some $800 million a year in commissions to member brokers on their trading. The institutions have become all the more displeased because brokerage houses in recent years have started their own mutual funds and now have about 70 of them. The brokerages collect commissions when they buy and sell stocks for their own funds.

Last week Dreyfus Corp., the independent mutual-fund giant, applied for membership on the New York Stock Exchange. The action was intended to force the exchange's governors to make an embarrassing choice: either admit Dreyfus or explain why member brokers should be allowed to run their own mutual funds. Paradoxically, Dreyfus Chairman Howard Stein (TIME cover, Aug. 24) is a strong opponent of institutional membership. But he explained last week: "If the brokers are to be allowed to compete with the institutions, then the institutions must not work under a financial handicap."

If the mutual funds do break into the exchange, brokers fear that they will lose so much in commissions that quite a few houses will be forced to fold. For their part, the mutual-fund men contend that there is more at stake than the row over commissions. They say that the brokers' entry into the mutual-fund business raises grave questions of conflict of interest. One reason: brokers may be tempted to "churn" the portfolios of their own mutual funds--that is, buy and sell excessively in order to earn commissions. Last week's move by Dreyfus is not so much aimed at compelling the exchange to allow mutual funds to go into the brokerage business, as forcing the brokerages out of the mutual-fund business.

If the exchange refuses Stein's application--as it seems likely to do--it may well invite an antitrust suit, on grounds of perpetuating unfair competition. The issues are so basic that they call for action both by the Congress and the new chairman of the Securities and Exchange Commission, who is expected to be appointed this week.

This file is automatically generated by a robot program, so reader's discretion is required.