STATEMENT OF POSITION OF AMERICAN SOCIETY OF CORPORATE SECRETARIES, INC. REGARDING STOCK CERTIFICATES

October 1, 1971

Corporate issuers are in general agreement with the concept of the expanded depository system proposed by BASIC.

They believe that any attempt to legislate the stock certificate out of existence in the near future would be a serious mistake.

They believe that a reduction of 80 to 90 per cent, in the issuance of stock certificates will result from:

1. The expanded depository system proposed by BASIC;

2. Greater acceptance and use of the jumbo stock certificate; and

3. Bulk segregation of securities by fiduciaries.

Accordingly, they oppose further consideration of a machine-readable certificate, at least until the full effect of the foregoing has been achieved.

They support the consolidation of the transfer and registrar function in the same entity through the elimination of the New York Stock Exchange requirement for a separate registrar.

They make the following affirmative recommendations:

1. The expanded depository system proposed by BASIC should be accompanied by a centralized proxy solicitation system to replace the present unsatisfactory system of proxy solicitation by brokers and to assure adequate means of communication between corporate issuers and their stockholders; and

2. Corporate issuers should be directly represented on any committee, group or task force created to consider or propose solutions of the problems associated with stock certificates.

Senator WILLIAMS. That concludes our hearings this morning. We will return tomorrow at 10 o'clock.

(Whereupon, at 12:15 p.m., the hearing was adjourned, to reconvene at 10 a.m., on Wednesday, May 10, 1972.)

CLEARANCE AND SETTLEMENT OF SECURITIES

TRANSACTIONS

WEDNESDAY, MAY 10, 1972

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,

SUBCOMMITTEE ON SECURITIES,

Washington, D.C.

The subcommittee met at 10:05 a.m., pursuant to adjournment, in room 5302, New Senate Office Building, Senator Harrison A. Williams, Jr., chairman of the subcommittee, presiding. Present: Senators Williams and Roth.

Senator WILLIAMS. The Subcommittee on Securities will resume hearings this morning on three bills, S. 2551, S. 3297, and S. 3412, dealing with the clearance and settlement of securities transactions.

The first witness is Mr. Richard B. Howland, president of Stock Clearing Corp. and executive vice president of the New York Stock Exchange.

You are right on deck.

STATEMENT OF RICHARD B. HOWLAND, PRESIDENT, STOCK CLEARING CORP. AND EXECUTIVE VICE PRESIDENT, NEW YORK STOCK EXCHANGE, INC.

Mr. HOWLAND. Good morning, sir. My name is Richard B. Howland. I am executive vice president of the New York Stock Exchange, Inc. I also serve as president of the Stock Clearing Corp., a wholly owned subsidiary of the exchange.

The New York Stock Exchange shares with the Congress and the regulatory authorities the desire and the determination to place in operation a securities processing system that will preclude any recurrence of the operational tangle experienced by this industry and the investing public during the year 1968 to 1970.

We believe that it is now technologically possible to create such a system, and that a major part of the groundwork for establishing a nationwide securities depository system has already been prepared. However, there is not yet full agreement on the best means for transforming the objective into a functioning entity. This is evident, I think, from the fact that the subcommittee is now considering three separate bills, each of which seeks to address the question in different and not necessarily compatible, ways.

The New York Stock Exchange's commitment to the development of an efficient securities depository dates back many years. As the

industry's pioneer in this area, we have spent a considerable amount of time, money and effort to bring the existing Central Certificate Service to its present stage of development. Improvement and expansion of CCS-particularly over the past two-and-a-half years-probably represents the most important single factor in the overall effort to upgrade the efficiency of the securities industry operation.

One of our major tasks is to make it clear that participation in a complex system aimed at immobilizing the stock certificate will be beneficial to the prospective participants. We must overcome a certain reluctance in certain quarters to abandon traditional methods and to implement innovative concepts. Success in this effort will depend to a considerable extent on our ability to keep restrictions and encumberances at a minimum. The existing depositories and clearing agents are all operated by registered national securities exchanges which are registered with the SEC and subject to its oversight and regulatory responsibility. But it is essential to recognize also that other prospective participants in the national depository-that is, broker's dealers, banks, insurance companies, pension funds, investment companies and others are all already subject to regulation by a variety of Federal and State agencies.

Legislation designed to facilitate the establishment of efficient operations and maximum participation in a nationwide depository must provide for a scheme of regulatory oversight that is compatible with existing regulatory patterns and jurisdiction.

We believe that, of the three bills now before the subcommittee, only S. 3412 offers the prospect of meeting the essential test of practicability. This would be accomplished by giving the SEC general oversight responsibilities similar to the Commission's existing oversight of registered national securities exchanges. I think it is significant that S. 3412 is based on recommendations made by the Federal agency having the greatest expertise in questions of securities industry operations.

Senate bill 3412 would give the SEC primary regulatory oversight over the elements of a nationwide system of securities clearance, settlement, and delivery established by the securities and banking industries and other users of such a system-but it would recognize the jurisdiction of other regulatory bodies with respect to elements of a system involving areas in which those regulators already have important regulatory responsibilities.

Although we support S. 3412, we would like to comment on several substantive sections of the bill.

Section 5 would give the SEC power to prescribe:

Minimum standards for the performance of functions, measures, and personnel standards for safe handling and custody of securities and funds, operational compatibility of the depository or clearing agency with other persons involved in the securities handling process, and reasonable nondiscriminatory access to the services provided by such depository or clearing agency.

We would agree the SEC should have primary regulatory oversight with respect to clearing agencies, but we believe that giving the Commission primary oversight with respect to depositories would engender jurisdictional problems with other regulatory authorities that could deter banks and other financial institutions from participating in a national depository.

We conclude and propose, therefore, that the primary oversight of depositories, and the power to make rules, should be exercised by the appropriate state banking authorities where depositories are formed as trust companies or banks with the Commission perhaps retaining authority to initiate rule changes in certain specified areas.

As a practical matter, this would mean that primary oversight of CCS, Inc. would be exercised by the New York State Department of Banking.

Focusing still on section 5, the language that gives the SEC the power to adopt "Minimum standards for performance of functions, measures and personnel standards for the safe handling of securities," seems to us to be ambiguous, and we foresee problems in its application unless the language is clarified. But more importantly, we strongly believe that the clearing agencies and depositories rather than the SEC should retain the authority to establish personnel and performance standards. Essentially, a private organization is best qualified to judge the performance of its own personnel. To abridge this prerogative of management would place unwarranted restrictions on the organization's ability to attract competent personnel as well as the personnel's ability to give optimum performance.

We propose that in restating the section, the SEC's rulemaking powers should be concentrated in the areas where they can be most effective with respect to establishing minimum standards for the safe handling of securities, compatibility with other systems, and nondiscriminatory access.

Section 8 of the bill would give the Commission authority to determine the form and format of stock certificates. Here we share the concern of the American Society of Corporate Secretaries and the Stock Transfer Association. We are all questioning whether the concept of uniformity is being overstressed.

For example, I think it can be predicted that a small corporation would be severely and unnecessarily burdened by a requirement to meet the same standards established by the New York Stock Exchange for its listed companies with respect to engraved certificates.

Through the years, the exchange has led the way in establishing and maintaining standards governing the format, content, and intrinsic security features of stock and bond certificates. In the absence of any persuasive arguments to the contrary, it would seem that the question of form of the certificate has been and can best be addressed by the industry itself. We think it would serve no practical purpose, for example, to disrupt existing well-established and effective procedures for such ongoing programs as the industry's effort to develop a single denominational form of certificate, now in the pilot stage.

Perhaps the most reasonable solution would be to authorize the SEC to work with the industry to develop minimum standards-and to further authorize the Commission to exempt from the relevant rules, those organizations which already meet or exceed such standards.

Section (d) (1) confers on the SEC the power to censure, bar, or suspend an officer, director or employee of a depository or clearing corporation if he has, "*** willfully violated or is unable to comply ***" with the act or the rules adopted by the Commission. We believe this also is unduly harsh-and unnecessary. We submit that it is suffi