STATEMENT BY JOHN M. COOKENBACH ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION MAY 10, 1972 Mr. Chairman and members of the Subcommittee my name is John M. Cookenbach. I am Executive Vice President, First Pennsylvania Banking and Trust Company, Philadelphia, Pennsylvania and I am President of the Trust Division of The American Bankers Association. I am accompanied this morning by Frank W. Kaestner, Senior Vice President, Manufacturers Hanover Trust Company, New York, New York who is Chairman of The American Bankers Association Trust Division Corporate Trust Activities Committee and William G. Milburn, Vice President, Mellon National Bank and Trust Company, Pittsburgh, Pennsylvania who is a member of The American Bankers Association Committee on Uniform Security Identification Procedures better known as the CUSIP Committee. We appreciate 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 paper work 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 paper work 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 paper work problems. 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 a decade ago. securities paper work problem and the need for change in securities processing The New York Clearing House Association in 1962 established a Securities Procedure Committee to study the problem. In 1964 The American Bankers Association, after discussions with the New York Clearing House Association established the Committee on Uniform Security Identification Procedures. The Committee was charged with developing a uniform securities identification program. The Committee after considerable effort developed the CUSIP numbering system and a standard description system. The Committee also established a technical group, known as the Securities Imprinting and Processing Task Force (SIP) to develop plans for the various pieces of paper involved in securities processing. This task force included representatives from all sectors of the securities industry including government regulators. The task force studied the stock certificate and its accompanying documents for two and a half years and in June 1969 it published an interim report recommending a man-machine readable card stock certificate. The recommended certificate could be processed both by punch card equipment and OCR equipment. The SIP report also recommended that preliminary steps be taken immediately to implement its recommendations. Not long after this report was released the New York Clearing House Association, the exchanges and the National Association of Securities Dealers established the Banking and Securities Industry Committee (BASIC) to develop inter-industry plans to solve the paper work problem. As a result, the SIP Task Force decided to publish a final report and to become inactive. In its final report, SIP re-emphasized its support of a man-machine readable card certificate. It proposed and recommended a standard man-machine processable transfer instruction form, batch control ticket, broker comparison form, and security transaction record. It also recommended the development of a Financial Industry Number System better known as FINS numbers. Thus, banking recognized the need for new processing procedures long before the paper work crunch and took action to find solutions. The CUSIP numbering system became mandatory last month and the use of four uniform forms (two of which are similar to the SIP forms) will become mandatory before the end of the year through action of the National Association of Securities Dealers, the New York Stock Exchange, The American Stock Exchange and the New York Clearing House Association. 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 paper work problem and avert another paper work 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. An example is the CUSIP numbering system. It was developed by 1968 at which time the ABA contracted with Standard Statistics Company, Inc. to implement the system. The use of the system, however, did not become mandatory until last month and there is still question as to how its use is to be enforced. Another example is the uniform forms. The ABA proposed four specific standard machine processable forms in 1970 and the use of two on a clerical basis will become mandatory later this year. As to the FINS numbering system almost everyone agrees that the system is essential but nother further has happened since it was recommended by the SIP task force. 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 inmediate 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 Committee is convinced such a certificate would be helpful in the effective operation of depositories and is necessary to permit the handling of what it expects to be an increasing volume of certificates held by individuals and not in the depository system. cation. The Association supports the establishment of a regional depository in any geographic area where there is economic and operational justifiInternal 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. A national group from the banking and securities industries should have the opportunity to complete the develop ment 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 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 believe 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 S.E.C. with regard to standards for 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 S.E.C., 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 S.E.C. 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 record keeping and reports by banks and are the authority which approves the registration |