Some funds began to expressly state that certificates would be issued only upon special request. While achieving some success with dealers and shareholders, a few funds took even more dramatic steps. For years on capital gain distributions, the practice had been to issue a certificate for full shares and a check for the fractional shares. A very expensive operation in forms cost alone, not to mention the matching process of certificate with balance check, to make sure it went out to the right person.

So the practice of reinvesting capital gains in full and fractional shares and all shares being held on deposit was adopted. While this startled many investors who had been used to receiving one and two share certificates for years and years and piling them up in the safe deposit box, the surprising majority of shareholders liked the idea and actually sent in their old certificates for deposit. Normally the fund allowed these people to join the accumulation plans, make small investments and get dividend reinvestments which heretofore had been denied them.

The effort to eliminate the stock certificate at Putnam has been quite dramatic. Prior to 1967, our biggest funds were at transfer agent banks. In 1967, Putnam became transfer agent for these funds using a system which had been designed for the express purpose of one account, an open account. In other words, the shareholder could have certificate shares, shares on deposit, or a combination of both in the same account, and he could receive his dividends and capital gains distribution in one of four different ways. At take-over date on Putnam Growth Fund, 40 percent of the shares outstanding were in certificate form. Three years later, only 25 percent are in certificate form, and to give you some idea, out of a total of roughly 70,000,000 shares outstanding, only 17,500,000 are in certificate form, 52,500,000 are on deposit. Some of our newer funds started at 25 percent, and we are continually working to lower that figure.

One of the reasons most often given for the investor needing a certificate is the possible desire to pledge his shares as collateral. This is a very valid point. However, he has two basic alternatives. He can, at the time he wants to pledge his shares, write to the transfer agent and request a certificate. In a little more than a week, sooner at Putnam, he will receive a certificate. Or he can execute an assignment form and deliver it to the lending institution. The lending institution forwards the assignment form to the transfer agent, where an escrow restriction is placed on the account. The escrow restriction is only removed upon a release from the lending institution.

67-228 - 72 - pt. 5 - 3

I recognize that the open end commitment of a fund to sell shares as well as buy them back is different from a supply and demand transaction inherent in a corporate security. And yet I believe another lesson can be learned from the mutual fund industry which directly pertains to a corporate security, and this is in an underwriting.

A little more than two years ago, if a mutual fund wanted to start business via an underwriting, it was the practice of the managing underwriter at the closing date to request thousands of certificates in 100-share lots in the name of each participating member.

Within a week or so, the majority of these certificates would be returned by the participating members requesting that they be transferred into the name of the investor. Again, usually in 100-share lots. If the fund had a 5,000,000 share offering, conceivably over 50,000 certificates at six cents apiece could be issued on the first go-round and another 50,000 on the second. For all practical purposes, the first 50,000 roughly $3,000 was a useless waste of certificates.

Since most mutual fund people and their transfer agents were by now dedicated to eliminating the certificate, the funds pressured the managing underwriters into agreeing that, whenever possible, no certificates would be issued at the closing date. Instead, the underwriter and the participating dealer would receive a special card receipt manually signed by the transfer agent, showing the number of shares due the underwriter or participating dealer. The receipt was called a nonnegotiable share deposit receipt. An account on the books of the fund was set up, registered in the name of the underwriter or the participating dealer, and as registration instructions were received, the shares were transferred out of the original account and into. the name of the individual shareholder's account.

Naturally, the individual shareholders had been encouraged not to request a certificate so that certificates were also eliminated on the second round.

The transfer agent, the fund and dealers worked closely together, cooperated through proper communication, and a very smooth underwriting was accomplished. So once again, the villain

of Wall Street had been beaten by the mutual fund industry.

Thank you.

MR. WHALEN

Thank you very much.

It is not only possible to eliminate the certificate, but as we see, some people are already doing it. Once again, the mutual fund industry is a leader.

IMPACT OF THE CERTIFICATELESS

SOCIETY ON THE BANKING INDUSTRY

MR. WHALEN

Following that part of the Bible that says you should keep the best wine until last, we thought we would have our anchor man tell us about the banker's view of the Certificateless Society. Our banker, Gene Tangney, spent twelve years with the Federal Reserve Bank of Boston, before he joined The First National Bank of Boston, where he is now a Senior Vice-President in charge of so many things I don't know where to start the list.

I am very pleased to introduce Mr. Eugene Tangney.

MR. TANGNEY

When Lybrand-Ross requested me to speak on the effects of the Certificateless Society in the banking industry, I reviewed the various areas where a stock certificate is used in banks and found that the use of the stock certificate involves almost every major function: the Loan Department, Investments, Trusts, Safekeeping, Corporate and Mutual Fund transfers, Data Processing, Protection and Control. All of the internal operations of these areas involve the use of the stock certificate to either implement, process or finalize a transaction and are high labororiented areas. Therefore, they are expensive.

The largest single item of expense besides cost of funds in the banking industry today is salaries. Also, the problems of maintaining a large clerical force, especially in periods of high employment and high volume, with the related turnover and training problems, makes the banking industry extremely interested in reducing the expenses and problems involved in areas today that require stock certificates as proof of ownership. The elimination of paper handling is of primary importance to us because, like most profit-making institutions, the elimination of expense is a great incentive.

Most banks in the United States today have successfully used the computer for the past ten years and have concentrated primarily on the large clerical processing areas. These include check processing, deposit and account maintenance, stock transfer, mutual fund transfer agencies, pension trust, corporate trust, and consumer credit. These systems have saved the banking industry millions of dollars. In fact, if we didn't automate our operations and we had today's volume, I doubt if there would be a sufficient labor force in the City of Boston to handle the amount of work that the Boston banks require.

The advent of the third-generation computer system and its tele-processing capabilities (what I mean by teleprocessing capabilities is the fact that remotely you can receive and give information to a computer with distance being of little consequence) is going to give us far greater energies and far greater abilities to cut even further the large clerical expense that we have. We have such systems in operation today; such as, the large third-generation systems of the airlines where data is entered and received to and from the computers over thousands of miles of wire network. The credit card industry is also developing a nationwide authorization system.

But to do this, we must continue to automate as much paper-handling as possible. Outside of the check, the stock certificate is the second most popular piece of paper used in the banking industry. In estimating the number of people in our bank involved with the stock certificate, we came up with the figure of roughly 20 percent of our employees handle the stock certificate in one form or another. The banking system is presently studying and implementing steps to reduce the number of checks with the ultimate goal of eliminating them completely. This is generally acknowledged within the banking system as a goal, not overnight, but to be implemented slowly. Likewise, I feel the first step in the Certificateless Society must be the acknowledgment by all segments of the industry that the certificate should be reduced in usage and ultimately eliminated from the security industry. Without total acceptance of this goal, little progress will be made in getting rid of the certificate.

In 1954 when the banking industry sat down to correct the problems of check processing in the banking system, there were many, many problems brought to consideration. The industry had to bring together the computer industry, the printing industry, the banking industry and the millions of customers of banks before settling on an input device for processing the billions of checks handled in the banking system.

After a great deal of investigation and soul searching, and the overcoming of many more problems than we are facing today, the banking industry accepted a new method of processing checks with the use of magnetic ink character recognition (MICR), and a new print font to be printed in magnetic ink at the bottom of the check contained the vital information necessary for the processing of that check. In addition to the above, our lack of sophistication in the computer arts and the limited capabilities of our computers added considerably to the problem. Today the securities industry can call upon far more sophisticated technical knowledge to implement a certificateless society. In the case of the check, the banking industry did not even have the equipment, yet they were able to convince the computer industry to design a magnetic readersorter and tie it into a computer system; to convince the printing industry to print MICR characters on the billions of checks and to convince the 14,000 bankers, especially the small banks, that this was necessary and that the heavy cost in the early stages

would prove in the long run to be advantageous both to the industry and the individual banks. There were many legal problems some of which, to my knowledge, have never been settled. There were operating problems, there were acceptance problems, there were design problems -- in fact at that time I can remember saying to myself "they'll never do it." Today over 96% of the 40 billion checks in the United States are processed without clerical intervention once the dollar amount has been encoded. The banking system is able to handle a compounded growth rate of between 8% 10% a year with no significant difficulty. This took the wholehearted cooperation of the American Bankers Association, Federal Reserve System -- a committee of highly competitive computer manufacturers and the printing industry. The securities industry can also call upon the National Association of Security Dealers, Securities and Exchange Commission, American Bankers Association, the computer industry, and other organizations to formulate these plans. There have been three well publicized reports on the solution to the securities industry problems North American Rockwell for the New York Stock Exchange; Sip Task Force of the CUSIP for ABA and Lybrand, with no general agreement as to the ultimate goal.

We have just passed through, in fact we are still suffering from, a period of time in which the securities industry; i.e. brokers, banks, stock exchanges, and the investing public, almost destroyed the equity capital markets of the United States. We came close to losing the liquidity of the industry and if volume had not decreased, it would have created a chaotic situation in which recovery might not have been possible. The capacity of the industry is still in question. A spokesman for the NYSE has recently stated that the industry can now handle a combined volume on the NY and AM exchanges of 24 million shares per day. In my opinion, the industry has not shown the improvement whereby we can handle anywhere near this volume. We are now averaging 12 million share days on the NYSE. Again, estimates say that by 1975 we must handle between 17 and 23 million shares with peaks that will reach a volume of 40 million shares on the NYSE only. They further suggest that by the end of the 70's the daily average volume on NYSE will be between 27 and 36 million with peaks reaching 63 million shares. If the stock certificate is still in existence and our capacity has not improved, the securities industry will never be able to handle a daily volume of 36 million shares unless drastic steps are implemented within the next 2 or 3 years. We may well find ourselves in the situation we were in during 1968 and 1969 or even worse. If we believe some of the economic forecasters, this situation may well be upon us in a far shorter period of time.