Senator WILLIAMS. Thank you very much.

Mr. John Cookenbach, president of the Trust Division of the American Bankers Association.

STATEMENT OF JOHN M. COOKENBACH, PRESIDENT, TRUST DIVISION, THE AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY FRANK W. KAESTNER, SENIOR VICE PRESIDENT, MANUFACTURERS HANOVER TRUST CO., NEW YORK, N.Y.; CHAIRMAN, THE AMERICAN BANKERS ASSOCIATION TRUST DIVISION CORPORATE TRUST ACTIVITIES COMMITTEE; AND WILLIAM G. MILBURN, VICE PRESIDENT, MELLON NATIONAL BANK AND TRUST CO., PITTSBURGH, PA.

Mr. COOKENBACH. Mr. Chairman and members of the subcommittee, my name is John Cookenbach. I am executive vice president of the First Pennsylvania Banking & Trust Co. in Philadelphia, Pa., and president of the Trust Division of the Americans Bankers Association. I am accompanied this morning by Frank Kaestner, senior vice president of Manufacturers Hanover Trust Co., in New York, who is chairman of the American Bankers Association Trust Division Corporate Trust Activities Committee, and by William G. Milburn, vice president, Mellon National Bank & Trust Co. of Pittsburgh, who is a member of the American Bankers Association Committee on Uniform Security Identification Procedures, better known as the CUSIP Committee; also by Robert L. Bevan, assistant federal legislative counsel of The American Bankers Association.

We appreciate very much, the opportunity to appear before the subcommittee on behalf of the American Bankers Association to discuss legislation which has been suggested to help solve the securities processing paperwork problem.

Banking is interested in this legislation from four points of view. Banks as fiduciaries are substantial customers of securities markets and are concerned on behalf of their trust customers that another paperwork crisis be avoided. Banks will be called upon to place securities held in a fiduciary or other capacity in depositories, if depositories are to offer an effective solution to the paperwork problem.

Also some banks today participate in the CCS collateral loan program to secure broker loans and this type of security arrangement will undoubtedly expand as depositories are further developed. Finally, many banks serve as transfer agents and registrars and thus are part of the securities handling process.

Banking, because of its experience with checks, recognized the securities paperwork problem and the need for change in securities processing a decade ago. Our statement, filed with the subcommittee outlines in some detail, the actions which the ABA, its CUSIP Committee, and the SIP task force have taken to improve the securities handling process. We believe these actions plus others which have been taken by the banking and securities industries, such as the future plans for CCS and the formation of the National Coordinating Group for a Comprehensive Depository System reveal the course which should be followed if Congress decides legislation is necessary to solve the paperwork problem and avert another paperwork crisis.

The private sector has proven itself capable of devising solutions but has experienced some difficulty translating these solutions into action when both the banking and securities industries are involved. Thus, the problem is one of implementing and enforcing standards developed by the private sector for efficient interchange of information between the various elements involved in securities processing.

The ABA believes the ultimate objective in modernizing securities processing should be the elimination of the stock certificate. As an immediate objective, the ABA supports the development of a regional depository system to immobilize as many stock certificates as possible. Since many years may be required to eliminate the certificate, the association's CUSIP Committee has just reaffirmed its position that a man-machine, processable stock certificate should be substituted for the present one.

The association supports the establishment of a regional depository in any geographic area where there is economic and operational justification. Internal operating procedures of such depositories do not need to be standardized but it is essential that standards be developed, implemented, and enforced, to permit the efficient interchange of information between depositories, banks, brokers, and transfer agents. These standards should include man-machine, processable documents, and computer-to-computer transmissions.

As I have suggested, significant progress has been made to date toward the establishment of a regional depository system and in the development and implementation of some securities processing standards. Considerable additional work, however, still remains to be done. A national group from the banking and securities industries should have the opportunity to complete the development of this system and its needed standards.

Such standards, including a procedure to eliminate the need for delivering certificates between individual depositories, must be implemented and enforced. If such control is to be exercised by regulatory agencies, it should be accomplished by a review of security processing operations for adequate control, auditing and conformity to standards. Regulatory authorities should not stipulate, nor unreasonably restrict an organization's internal systems, procedures, and staffing, nor limit an organization in executing its management responsibilities. Turning now to the specific bills pending before the subcommittee, we beleve that if Congress decides legislation is necessary, S. 3412 provides the best approach to meeting the paper work problem. We urge, however, a number of changes.

Of primary concern to banking is section 6 of the bill. It requires transfer agents to comply with rules and regulations prescribed by the SEC, with regard to standards of performance of the transfer function, standards for safe handling of securities, and operational compatibility with other persons involved in the securities handling process.

We recognize the desirability for one agency, the SEC, to establish minimum general standards for compatibility of transfer facilities with other facilities in the securities handling process, but we see no reason for, and object to, giving the SEC authority over banks to establish standards for performance and standards for safe handling of securities, both of which, are internal operations.

The Federal banking authorities in other sections of the bill are assigned the task of enforcing its requirements as to banks, are authorized to prescribe rules and regulations with regard to recordkeeping and reports by banks, and are the authority which approves the registration of bank transfer agents.

We urge that the same approach be followed in this section and that bank transfer agents be required to comply with rules and regulations prescribed by the appropriate Federal bank regulatory agency with regard to minimum general standards to assure performance capability and to assure safe handling and custody of securities and funds.

The next major concern of banking is the treatment of depositories. If a depository system is to have significant impact in immobilizing certificates, banks must place securities held in a fiduciary, or other capacity, in the custody of depositories. Banks are held to a high standard of care in the protection of trust assets and they can not be expected to place such assets in depositories, unless they have the utmost confidence in their operation and management.

Under the bill, depositories have a flavor of strictly securities institutions because they are registered and regulated by the SEC. It is our belief that banks would more readily participate in depositories with regard to trust assets if they more closely resembled banks, and if in their day-to-day operations were subject to banking regulators, and bank examiners.

Thus, we suggest that depositories organized as banks, be directly regulated by banking authorities with final control in the SEC, so that operational compatibility can be assured where it is needed. Such a system could be established by requiring depositories to comply with rules of procedure which they have adopted and which have been approved by the appropriate banking agency and the SEC. Enforcement should be in the hands of the appropriate banking authority. Appropriate authority should be the state banking authority for depositories chartered under State banking laws, and the Comptroller of the Currency for those chartered under the National Bank Act. Our prepared statement lists a number of less significant changes in S. 3412 which are also needed. I will mention only a few.

In section 3, the definition of depository should be precise enough to exclude transfer agent depositories. The function of such depositories is closely related to the transfer agent function and thus they should be regulated the same as transfer agents.

Section 9(a), should provide that in the case of a transfer agent or depository, the information and documents necessary to update its registration statement need not be filed more often than once a year, and the requirement is fulfilled by providing such material during examination by the appropriate regulatory authority.

Subsection (b) of section 11, should be changed to prohibit a regulatory agency from issuing proposed regulations on transfer agents for comment if two or more other Federal regulatory agencies disapprove of the proposed regulations.

Finally, National Banking Associations should be permitted, with the approval of the Comptroller to invest a limited amount in the stock of one or more depositories. This again is for the purposes of encouraging banks to place trust assets in depositories. A bank is more

likely to place such assets in a depository if it has some voice in the management of the depository.

If S. 3412 is amended in accordance with these suggestions, it would provide a workable regulatory scheme for the securities handling process. It would leave enough initiative with the private sector to allow the growth of an effective depository system and it would allow the SEC to tie the system together where compatibility is necessary. With regard to the other two bills. S. 2551 and S. 3297, we believe parts of each have merit. From what I have said before, it is rather evident that we oppose the establishment of a National Securities Corporation as called for in S. 2551, because we believe the private sector has made substantial progress in establishing a regional depository system and should be allowed to continue its effort. However, we support the idea of a National Commission on Uniform Securities Laws, to study State securities laws. to recommend uniform statutes. and to promote their enactment by the States.

The Commission should not attempt to deal with Federal regulation but should limit itself completely to State regulation.

S. 3297 seems to be aimed throughout at regulation of the securities industry. However, through the rules required of "clearing agencies," which by definition would include "depositories," the bill would bring within the jurisdiction and control of the SEC all the officers, directors, employees, and agents of "participants."

A depository would be required to establish specified standards of training and experience for the personnel of a participant bank. A depository could require registration of bank personnel and could discipline them subject to SEC review. The SEC could require a depository to adopt any rule it wished or to change any of its rules.

There is no provision in the bill that these depository rules apply only to bank personnel involved in securities handling, but even if there were, this SEC regulatory authority would be unnecessary because bank regulatory authorities already have extensive authority over banks and their personnel. It is questionable that any bank would join a depository after enactment of this measure. And those that are now participating in the collateral loan program might withdraw. Thus, the bill might undo the progress which has been made in the private sector during the last 2 years. Consequently, in our judgment, the approach of this bill in meeting the paper work problem is wrong. The study of the use of nominees called for by section 5 of the bill seems inconsistent with earlier provisions regulating depositories because the use of a depository by definition necessitates the use of a nominee name.

Section 6 of the bill has the full support of the association, because the best laid plans of the Congress, the SEC, the banking regulators, the securities industry, and the banks could go astray through the enactment of a general securities transfer tax by a State in which a depository is located.

In conclusion, I want to repeat that the association supports the approach of S. 3412 with certain important amendments if Congress decides legislation is necessary to solve the paper work problem.

Mr. Chairman, I want to thank the subcommittee for this opportunity to appear and discuss the position of the American Banking Association.

(Full statement of Mr. John Cookenbach is reprinted at p. 287). Senator WILLIAMS. Thank you very much. First, in your statement, you say that the private sector has experienced difficulty in implementing solutions to securities handling problems because of the inability of the banks and brokers to work together.

Do you have any suggestions for overcoming these problems?

Mr. KAESTNER. I would like to answer that, Senator Williams, if I could. I think a lack of coordination and a lack of understanding of each other's problems has led us to this difficulty.

However, this coordination and understanding, to some extent, has been improved by BASIC, the Banking and Securities Industry Committee. The only criticism I have of the BASIC approach is I do not know if it is forceful enough because this coordination and understanding has to be nationwide.

Senator WILLIAMS. You say you would be willing to accept SEC authority to set standards for compatibility of transfer facilities but not performance and safekeeping standards.

I wonder if this means, as an example, that the SEC should not be empowered to require transfer agents to complete transfers within 48 or 72 hours of receipt?

Mr. COOKENBACH. Senator, we feel that compatibility would be compatibility between the various securities handlers on a national basis. Banks are already subject to the regulation of the Federal Reserve, the FDIC, State banking departments and the Comptroller of the Currency.

We feel that the enforcement procedures should be carried out by the banking regulatory authorities rather than the SEC. But, as to the overall compatibility between the securities industry, the brokers and the banks, we feel that the SEC has a very important and necessary function.

Senator WILLIAMS. That is a general statement. I wanted to be specific in terms of one example. On the time for the completion of transfer, is that a question of compatibility or performance?

Mr. COOKENBACH. I guess that might be both.

Senator WILLIAMS. Who answers the question, then?

Mr. COOKENBACH. I would think if the SEC establishes the requirement or standard of 48, or 72 hours, then the banking authorities could enforce that. Of course, our feeling here is, Senator, that these standards would be developed jointly by the banking authorities and the SEC.

Senator WILLIAMS. This is arriving at major decisions by committee. It is a little cumbersome, I would think, working together on some of these specific standards that we are talking about or contemplating? Mr. COOKENBACH. Yes, but the bank regulatory authorities, of course, have a lot of contact with the banks now, the banks are used to working with them, it works out fairly satisfactorily.

Senator WILLIAMS. This is the mode of operation now. I would like to hear that.

Where now do they actually get together and come to agreement on some of the working rules of the industry?

Mr. COOKENBACH. The banking regulatory authorities and the SEC?

Senator WILLIAMS. Yes.

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