As Dave Hughey has indicated to us, the Mutual Funds industry has met with some success in this venture. They have partially eliminated the certificate in the Mutual Funds industry. This was accomplished because it was advantageous to the Mutual Funds industry to eliminate the certificate so that automatic reinvestment of dividends could be accomplisned by computer processing and the assets of mutual funds not be reduced by dividend payments. This program benefited both the Mutual Funds industry and the investing public. It is a good system when everyone benefits. The fastest way to implement any new system is to make it profitable for all parties. Preliminary estimates indicate that with the total elimination of the stock certificate, it would be less expensive for bank transfer agents in the long run to issue statements of holdings than it would be to continue to issue and redeem stock certificates. The cost of building a new system would be high, but the ultimate savings can be realized. The principal problems are primarily concerned with the use of the certificate as proof of ownership -- its function as a legal document determining good title. Arguments are given that psychologically the investing public wants a legal document to prove ownership and to maintain the relatively easy method for the sale of such assets. We faced the same problem in 1962-1963 when it was decided at our bank to eliminate savings passbooks. The incentive for us to eliminate the passbook was a substantial cost saving. At that time we had 43 savings tellers and their related teller bookkeeping machines. These tellers were trained for savings deposits only and did not handle general commercial work. was our desire to make all teller stations general purpose and, therefore, faced the possible expense of installing some 200 teller bookkeeping machines. To avoid this, we decided to eliminate the passbook, to upgrade the savings teller to general purpose tellers, and to make available to our customers more tellers to handle all of their retail banking needs. When the final decision was being made to eliminate the passbook, the arguments were extremely strong on the part of some individuals who were concerned that the public would not accept the decision. It was pointed out that the least sophisticated of our depositors who did not have experience with statement banking; such as demand deposit (checkbook deposits); would not feel safe unless they had a passbook as proof of ownership. The successful elimination of these passbooks came about because of the elimination of expenses, which was our incentive; the upgrading of the tellers to general purpose tellers, their incentive; and the selling by all concerned to our customers that savings' statements had the same legitimacy as a passbook. issue memo books to those depositors that insisted upon a piece of paper, but specifically stated that the memo book was not an official record of the bank and was provided to aid the depositor in their own accounting systems. Today, The First National Bank of Boston has over 200 general purpose tellers that handle all normal retail banking transactions with no passbooks in existence. The elimination of the stock certificate from the industry and insuring improved operational capacity must be directly connected with the computer capacity that is now available to the industry. We must design programs that are machine oriented that eliminate as much as possible human intervention -- that maintain at all times the controls that are essential to an orderly process. The system must discipline the entire security industry to handle, timely, all situations in which the proof of ownership is necessary to transact any one of the several transactions that now take place using the actual certificate. There must be detailed information available and communication established to facilitate the transfer, collateralizing, custodianship, and all other aspects of present use of the certificate. It would seem to me that as a practical matter, each transfer agent could be the depository for its customers' share balance. The information contained in the computer would have to be readily available through tele-processing and inquiry stations so that the buying and selling of shares could be facilitated through an inquiry program similar to that being installed for the bank credit card system. There are two major credit card systems in the United States today -- Master Charge and BankAmericard. If you are a holder of either of these cards and you were in San Francisco and wanted to buy $200 worth of goods, the seller would make a local phone call which is tied into a switching network that routes the call to an individual operating a cathode-ray tube that is tied into a computer that looks up your account in Boston and determines whether the credit card company will authorize the sale or not. These switching centers and computer centers are in the process of being installed today so that every corner of the United States through the use of a local phone call can verify the credit standing of all holders of Master Charge or BankAmericard. Likewise, this basic system could function in the transferring of shares of stock. For example: if a customer in California wanted to sell shares of Howard Johnson stock and First National Bank is the transfer agent, he would contact his broker indicating his desire to sell. The broker would first verify that the shareholder did, in fact, own such shares. This would be done by telecommunications by calling a local phone number which is connected to a communications switching center through which the inquiry could be made of the computer, or a centralized computer system maintaining share balances of several transfer agents. individual would then sign an assignment, signature to be guaranteed as is now the case, of his shares to be sold and the transaction would be put through the auction exchange as it is now. could function similar to our present check system within the United States, since a check is legally a letter of instructions requesting a bank to perform an action concerning the transfer of funds. This assignment could be similar, a letter of instructions requesting that shares be transferred from a seller's name to a buyer. The transaction would be handled as it is now, only we could deal with standardized formats with the buy and sell instructions forwarded to the transfer agent by the buying broker. transfer agent would then input the transaction to a computer and statements sent to the new buyer through his broker and to the seller for audit verification. Since the bank would be acting as a depository for the shares, it would be functioning in a similar manner that banks now function with demand deposits. With this system, there would be no need for the transfer agents to be located in New York City and the requirement of the NYSE for a transfer agent below Chamber Street would be eliminated. The large transfer activity could be disbursed with less concentration in one area of the country. In institutional transactions, the Central Certificate Service could remain for broker to broker transactions where large numbers of shares would be held in the nominee name of the Central Certificate Service. On record dates, CCS could notify transfer agents for breakups and dividend disbursements. One of the great fears I would have if we used a national central certificate depository located in New York City would be that all of the bookkeeping of the equity capital markets of the United States would be contained in one institution. By allowing each transfer agent to be the depository, just like a demand deposit in a bank, you decentralize the concentration of the capital bookkeeping structure of the United States. For large institutional custodianships, in which banks play by far the largest role, it would mean instead of having millions of certificates held in safekeeping, segregated by accounts, that a statement of holdings could be maintained without the needs of vault facilities, security guards and many of the legal technicalities. The tremendous cost and risk of transportation of these securities between banks, institutions, custodians and individuals would be eliminated. We alone spend over $50,000 a year to transport securities between here and New York. Another use of the certificate in banking is its use as collateral for loans to individuals, businesses and brokers. The procedure for this type of loan would be similar to our procedure today for loaning against the savings balances when no passbook has been issued. The shareholder would sign an assignment of his share balances, the lending institution would then forward that assignment to the transfer agent who would return it to the lending institution. The transfer agent would take responsibility as they do now for a stop payment on those shares until a release is received. In case of default of a loan, the assignment would give the transfer agent permission to change the registration to the lending institution. On brokers' loans, the master file can be effected through the use of telex wire system using coded messages as the banking system does and has done for a number of years with money transfers. Based on these telex messages, the transfer agent would escrow shares as collateral and acknowledge the assignment through the telex messages. Today in the banking industry, a private wire system is maintained through which billions of dollars are transferred throughout the United States daily based on coded telex messages. No legal documents are involved. Through the Federal Reserve wire system, additional billions of dollars are transferred between banks and banks to customers and corporations, with no legal documents required. All of these suggested systems would be based on an online computer system in the transfer function whereby instant information and instant updating of the master file would be necessary to service the loan function of collateral shares. Many more complex computer systems are now functioning in the United States. Far more value is transferred throughout the United States without legal pieces of paper to verify ownership. Wire transfer systems -- airline reservations systems -air controller system -- Federal Reserve transfer of government securities are examples of existing complex nationwide systems. There is no reason why, if the securities industry can get together and decide upon one common goal and make the necessary decisions and stick to them, a new transfer system could not be put into effect within five years. Thank you. MR. WHALEN Thank you, Gene. QUESTIONS AND ANSWERS, CLOSING COMMENTS MR. WHALEN THE FLOOR Now is the time for any and all questions. Mr. Hughey, the question on that 14,000,000 shares, any idea what the percentage of straight-name certificates or nominee-name certificates? MR. HUGHEY Very few. Most of our accounts are individual accounts on straight name as you referred to them. I don't have it with but I know historically it is very small. THE FLOOR Could I ask Mr. Tangney a question? Gene, mutual fund servicing agents, when you transfer shares from the original owner to another, there is an application with a signature on file. Did you get into the business of transferring certificates on a much broader scale, where you don't have planned accounts or anything like that as the equivalent? How do you control the mechanism of having a valid transfer? Do you have to set up a system of having official signatures on record? What about bank guarantees of signatures and things of that sort? MR. TANGNEY Take the instance of the fellow in California when he walks into the brokerage firm and wants to see a certificate. He has to make out an order to sell and address it to the transferee and when he signs his name, or he goes to his bank and gets his signature guarantor, and we rely on the signature guarantor as we do today. That would be part of the instrument. Signature files would be impossible, as we both know. THE FLOOR Essentially, you would be relying on the bank guarantee of the signature system, just as we do today. If you had transfer agents acting as custodians, what about the companies who act as their own transfer agents, would that have to be eliminated? |