Table 1

SUMMARY OF COST OF FAILS AND INPUT CHANGES FOR ALTERNATIVE TRADE COMPLETION SYSTEMS

This applies to both cash and institutional customers.

* NCC is currently clearing an average of 9,000 OTC trades per day for 160 brokers in New York City. Approximately 60% of those trades are handled via continuous net settlement (CNS), the remaining 40% via the daily net settlement system inherited from the National Over the Counter Clearing Corp.; the percentage of CNS trades is constantly increasing as the program moves out of the pilot stage.

Of course, the 9,000 trades so handled represents only a fraction of the OTC transactions cleared every day nationwide. (Although there are no satisfactory data, the volume of OTC transactions is variously estimated at between 40, 000 and 100,000 trades per day.) Most of the remainder are still cleared and settled in the old trade-for-trade, firm-to-firm method.

Senator WILLIAMS. Mr. Eli Weinberg, partner of Lybrand, Ross Bros. & Montgomery.

We are certainly pleased and delighted to have you with us this morning, Mr. Weinberg. We know this is going to be important for our deliberations.

STATEMENT OF ELI WEINBERG, PARTNER, LYBRAND,

ROSS BROS. & MONTGOMERY

Mr. WEINBERG. Thank you, Senator Williams and Senator Roth, for the invitation to appear before your committee. I would like to first express a feeling of gratitude that these two bills and the SEC bill have been presented to the Congress. I know that many people, including your committee, have spent a lot of time studying the issues, and it is very satisfying to see that some positive results are going to come out of this work. All three bills will make a contribution in that way.

I would also like to comment on the interim report issued by this committee on February 4, 1972. The report is excellent. It does a fine job of making some very constructive recommendations for improvement in the industry.

Senator WILLIAMS. I am pleased to hear that.

Mr. WEINBERG. I am pleased to see that the bill follows many of these points which have been developed in the report itself.

I have reviewed the three bills that are up for discussion; the bill prepared by Senator Roth, by Senator Williams, and the SEC. I would like to just summarize the parts of the proposed bills that I believe would be most desirable and in the long-term best interests of the securities industry.

1. The recommendation made by Senator Roth's bill, S. 2551, relating to the establishment of a Commission on Uniform Security Laws, is a very important step to the development of a consistent and hopefully effective vehicle to assure the prompt modification of State laws which now hamper the development of sophisticated automation systems required to process security transactions. It is important that we focus on the problem of State laws, as they affect the processing system.

2. The regulation of all clearing and settlement systems by the Securities and Exchange Commission as proposed in your bill, Senator Williams, is vital to assure the integration of all security handling systems, regardless of the particular mechanism or marketplace used to make the initial sale.

3. The establishment of a fixed date for the elimination of stock certificates as recommended in the Williams bill should be an effective incentive for the Commission and for the industry to move quickly to develop improved systems of recording transactions.

4. The regulation of transfer agents, depositories, and clearing agents as proposed in the SEC bill is long overdue in view of the interdependence of these functions and the need for greater integration and standardization. The proposed regulation, however, is very cumbersome. Problems of defining responsibility, agreement on common procedures, and other areas of communication may inhibit the prompt implementation of effective and efficient systems.

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This type of diffused responsibility has already been identified as one of the reasons prompt action was not taken to minimize the operating problems of the securities industry in the past.

I believe that in the transfer agent and depository area, direct responsibility for regulation should be given to the SEC.

I believe the committee should recommend a combination of the three bills, combining the elements just mentioned, and in addition providing for the following:

1. A specific program to design and implement a securities processing system by the Securities and Exchange Commission.

2. I think it should focus on a method of funding such a program, based on a transaction charge to be paid by banks and brokers.

3. We should focus more carefully on the problem of setting standards of performance, primarily for supervisory employees.

Senator WILLIAMS. The requirement for setting operating standards as defined in your bill is very important. I have a very real concern however, that in setting these standards we may make it more difficult for minority groups and other disadvantaged groups to enter the securities industry. The setting of standards should focus on the supervisory and managerial level and not necessarily on all clerical people at every level in the industry. A satisfactory alternative would be to call for mandatory training programs for all new employees.

I think these provisions as suggested above would best serve the interests of the investing public, and at the same time assure the operational stability of the securities industry.

I have attached specific comments on each of the bills. I would like to thank you again for this opportunity to present my views. (The specific comments follow:)

8. 2551

This Bill, submitted by Senator Roth, has two major sections. Title I deals with the establishment of a national securities settlement system. Title II deals with the establishment of a Commission to develop uniform securities laws.

COMMISSION ON UNIFORM SECURITIES LAWS

The establishment of a Commission on Uniform Securities Laws should be a very important step toward resolving the long-term securities handling problems of the banking and brokerage industry. Many state laws which inhibit development of automation in this area should be modified. The proposed Commission can be an effective agent to review these laws and to work in a dedicated fashion to revise and modify them to permit the establishment of an efficient and effective national clearing system. I would like to suggest, however, that the directives in Title II be made stronger. Specifically Section 203, Item 4 (Page 12, Line 25) calls for the Commission to "make and circulate such reports. . . as may be necessary to facilitate the enactment of . . . amendments.... (to state laws)." It would be more useful if the wording were made stronger to give the Commission a clear mandate from Congress to work in a positive rather than passive way toward achieving revision of the applicable state laws. Similarly, in Section 203, Item (4) (b) (Page 13, Line 3), the Commission is given a finite life which expires on February 1, 1975. It is desirable for a Commission such as this one to have a specified period of existence so it will be encouraged to complete its work in an expeditious manner. However, the period specified will probably result in an actual life of only about two years. This may be too short a time to accomplish the objectives set out, particularly in view of the need to work with a multiplicity of State Legislatures, and the fact that these Legislatures sometimes require several separate sessions to enact legislation. I would recommend that the life of the Commission be expanded to a period not to exceed five years.

I also recommend that the Commission be directed to include within its area of responsibility the need to modify state laws relating to estates, trusts, and other custodial arrangements. At the present time, restrictive laws in this area significantly hamper development of integrated certificateless systems.

Title II of the proposed Bill, which would create a Commission on Uniform Securities Laws, is a very desirable objective, and I encourage and support that part of the Bill. However, as regards the first part of the proposed Bill, Title I, the establishment of a National Securities Corporation, I am somewhat less enthusiastic.

NATIONAL SECURITIES CORPORATION

In my view, there is a good possibility that the present functions, which we now refer to as clearing and settlement, will cease to exist within the next five to ten years. In the future securities transactions will most likely take place directly between a broker, a stock exchange or other trading mechanism and a bank transfer agent. As a result it would be short sighted to establish an organization, issue bonds and sell stocks and then find the corporation has become obsolete within the next few years.

The National Securities Corporation is modeled somewhat after the COMSAT organization. I don't believe the securities industry situation is entirely comparable to that of the communications environment in which COMSAT was established. One of COMSAT's major purposes was to develop a new technology and offer services in areas that had not previously been developed by existing organizations. In the securities industry, however, the functions of registering and transferring securities which are likely to be major responsibilities of this corporation, are already being done by several thousand banks all around the country. Many of these banks find it a very profitable part of their business. It seems contrary to the general economic policy of this country to establish a new Government-sponsored organization to take over operations which are already being done willingly and for profit by private companies.

This is not to say that the manner in which transfer operations are done shouldn't be substantially improved. I think that's exactly the problem here. What is needed is not a new organization to actually do the clearing, settlement and transfer work, but rather an organization, a commission, or some vehicle to design a better method of transferring ownership of securities, and then integrating the new system into the existing network of trading and transfer facilities. Therefore, I suggest that the Bill be modified to call for the design and implementation of a new settlement system, to be done by some existing agency, presumably the Securities and Exchange Commission. The operation of the improved system should remain within the present structure of bank transfer agents.

SPECIFIC CHANGES

The proposed Bill in Section 102(5) (c) (Page 3, Line 5) would allow the development of competing transfer systems without requiring that such systems be compatible with the overall integrated system design referred to previously. It is vital to the success of these systems that they all be compatible.

The term of office for the directors should be on an overlapping basis. They should also have a specific term of office and not serve solely at the President's discretion (Section 104 (b), Page 4, Line 9).

The Bill requires all directors of the corporation to be on a full-time basis (Section 104 (c), Page 4, Line 15). It would be advantageous for an organization such as this one, to have a mixture of directors, some of whom are full-time officers and employees of the corporation and some outside directors, representing the public, the Securities Industry, and the Banking Industry, who will serve only on a part-time basis.

Section 104(d) (Page 4, Line 22) calls for the corporation to issue stock. It would be a good precedent not to require this corporation to issue physical stock, but perhaps to suggest some other evidences of ownership.

Section 107 refers to the financing of the new corporation. In my opinion, in addition to the $1 million initially to be supplied by the Treasury, any further financing of such a corporation would require the guarantee of the Federal Government.

I recommend that such a corporation, and especially the Study Commission, have a specific method of financing related to a securities transaction charge levied on banks and brokers. This method of financing would remove the cor