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 S.E.C., 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 solving the paper work problem.

Mr. Chairman, I want to thank the Subcommittee for this opportunity to appear and discuss the position of the Association. I would like to offer the Association's services to the Subcommittee to help in any way we can.

78-429 0-72-20

Senator WILLIAMS. Thank you very much, gentlemen. Mr. Walter F. Thomas, vice chairman of the Clearing House Committee of the New York Clearing House Association.

You may proceed as you care to.

STATEMENT OF WALTER F. THOMAS, VICE CHAIRMAN, MANUFACTURERS HANOVER TRUST CO., ON BEHALF OF THE NEW YORK CLEARING HOUSE ASSOCIATION; ACCOMPANIED BY JOHN F. LEE, EXECUTIVE VICE PRESIDENT, NEW YORK CLEARING HOUSE ASSOCIATION, AND DAVID G. GRAY, SIMPSON THACHER & BARTLETT, COUNSEL TO MANUFACTURERS HANOVER TRUST CO. Mr. THOMAS. Mr. Chairman and members of the subcommittee, my name is Walter F. Thomas. I am vice chairman of the board of Manufacturers Hanover Trust Co. of New York. I am appearing before you today at your invitation to express the views of the New York Clearing House Association on proposed legislation affecting the transfer, clearance, and settlement of securities transactions.

The New York Clearing House is an association of 11 principal commercial banks in New York City.

On my left is Mr. John F. Lee, executive vice president of the association, and on my right is Mr. David G. Gray, a member of the firm of Simpson Thacher & Bartlett, counsel to our bank. These gentlemen will be pleased to assist me in answering any questions you may have on our testimony.

We appreciate the subcommittee's consideration in reserving time to hear the views of the New York Clearing House on this very important subject.

That it is important to us is evidenced by the fact that members of our association act as transfer or cotransfer agent for about 95 percent of the issues listed for trading on the New York and American Stock Exchanges and as registrar and coregistrar of approximately 81 percent of these same issues, and, of course, we act in the same capacities for thousands of other issues traded on other exchanges or over the counter.

We have filed a complete written statement with the subcommittee. So I propose to limit my oral testimony to those provisions in the bills which would apply to bank transfer agents and registrars and which we feel will result in unnecessary, duplicative regulation.

We share as banks the desire of every stockholder, issuer, and broker for a system of speedy, efficient, and economic transfer of securities. We believe, however, that the present system is working well and that the extent of improvement since 1969 as a result of voluntary action by the industry and, to my intimate knowledge, by bank transfer agents, is not well understood or appreciated.

We do not believe that legislation aimed at regulating banks in this field should ignore the existing pattern of bank regulation and examination.

Two bills, S. 2551 and S. 3297, presently before the subcommittee, do ignore the role of the Federal and State banking agencies by granting responsibility for registration, basic standards and enforcement solely to the SEC.

The other bill, S. 3412, would create, we think, an unworkable division of responsibility between the Commission and the banking agencies.

We strongly urge upon the subcommittee and the Congress that any legislation which may be adopted leave full responsibility for the internal operations of bank transfer agents and registrars where it iswith the appropriate banking agencies.

In terms of the need for legislation, I would call to your attention statistics which establish that there has been a continuing decrease in recent years in the number of stock transfers. For example, the volume of such transfers at the banks of our association during the first quarter of 1972 was down 22 percent from what it was in the first quarter of 1969.

The reasons for this substantial reduction are numerous, including a steadily increasing percentage of ownership by institutional investors, increasing use of "jumbo" certificates, and the resulting lower volume of individual certificates being transferred.

Another most important reason for this trend was given in Mr. Howland's testimony today; that is, the continuing effort by all parties to immobilize the stock certificate.

The successful operation in New York City of Central Certificate Service provides a real system for book entry transfers.

Some figures on this might be interesting. In 1969, when CCS was just beginning operations, only 1,212 issues of stock were eligible for deposit and transfer, and all of them were listed on the New York Stock Exchange.

Now 2,768 issues are eligible, embracing in addition to New York Stock Exchange issues, issues listed on the American Stock Exchange, the National Stock Exchange, and some traded over the counter.

In terms of total shares, in 1969 there were 464 million shares on deposit with CCS. Today there are 1.2 billion shares on deposit.

Total book entry deliveries at CCS have increased from 300 million shares in the first quarter of 1970 to 1,322 million shares in the first quarter of 1972.

These figures are bound to increase dramatically in the near future with a corresponding decrease in the number of actual transfers.

Before turning to specific portions of the proposed legislation, I would like to summarize some of the changes which have occurred in the New York Clearing House banks as a result of the "paperwork crunch" of 1968-70.

While we do not argue that expenditure of money alone demonstrates improvement in operations, I think you would be interested to know that the 11 member banks of this association have spent approximately $46 million since 1969 for capital expenditures in the stock transfer and registrar area.

Perhaps more important, however, are the changes and improvements in procedures which have occurred. Significant increases in trained personnel have been made. Night forces have been added where none existed before. Some of our operations were computerized before 1969, but five of our member banks have computerized their transfer and registrar work since that date.

All our members have installed regular testing procedures to determine the level of work performance. They have instituted special

audits over movement control and safekeeping of their certificates, and they have given their employees special training.

All our banks have become highly sensitive to correspondence from stockholders of corporations and all other members of the investment community. Reports to top-level management are now required to make certain that all such inquiries are properly answered.

Industrywide steps have been taken, some at the initiative of our association, to improve overall performance of transfer agents. These steps include new standardized forms and procedures for controlling the movement of certificates in bulk between brokers and banks, the use of facsimile signatures in place of manual signatures, and, of course, the employment of "jumbo" certificates.

I might at this point cite some figures in my own bank to show you the type of performance we have been giving in recent years. Since 1969, we have acted as transfer agent or cotransfer agent for approximately 450 issues of stock for some 350 different companies, and we have handled an average of approximately 20,000 transfers per day. In more than 90 percent of those transactions, we have completed the transfer within the 48-hour turnaround period.

With this background, let me outline the proposed regulatory framework and indicate specifically where we feel it goes too far.

I shall use S. 3412, the bill introduced by Mr. Williams at the request of SEC, as my model because it gives at least some recognition to the role of the Federal banking agencies.

Briefly, S. 3412 would require each bank transfer agent and registrar to register with the appropriate Federal bank regulatory agency, which, depending upon the bank involved, would be the FDIC, the Comptroller of the Currency, or the Federal Reserve Board.

This registration statement must give information with regard to performance, measures and personnel standards, and operational compatibility. The bill goes on to require banks to update this information and gives broad power to the banking authorities to require preservation of records and to examine such records.

To assure maximum uniformity, the bill states that the various banking agencies shall consult and cooperate with each other and State banking authorities "toward the end that the accounts, correspondence, memorandum, papers, books, records, and other data required of banks **and the inspections thereof, be in accord with sound banking practices and fulfill mutual regulatory needs to the extent practicable."

These provisions of S. 3412 rightly, in our opinion, recognize the role which is being played by bank regulatory agencies to assure that bank transfer agent and registrar functions are performed properly.

By delegating to them the responsibility to review registration statements which are designed to elicit information as to performance standards, the bill concedes the competence of these agencies to evaluate and determine proper performance standards. Accordingly, it would seem logical to delegate to these agencies the responsibility for setting the basic rules and regulations as to minimum standards of performance.

Nevertheless, and this is the feature which we oppose, S. 3412 provides that the Commission shall have the power to set the standards for

bank transfer agents and registrars both in terms of internal performance and external compatibility.

If the stock transfer and registration activities of banks were not already regulated and examined by the bank supervisory agencies, perhaps we could understand the need for the Commission to establish standards, but this power presently exists and is being utilized by banking agencies.

Bank examiners are thoroughly familiar with the operational and personnel requirements for safe and efficient bank stock transfer and registrar departments. Bank examiners have been increasingly vigilant in the attention they have paid to stock transfer departments since the "paperwork crunch" of 1968-70.

The Federal Reserve Bank of New York has completely revised its instructions to examiners, placing emphasis upon performance time, backlogs, and procedures adopted by management for monitoring the status of its own performance.

The regional office of the Comptroller of the Currency in New York is now placing great emphasis during the course of its examination upon the turnaround time in the stock transfer departments.

The superintendent of banks of New York State issues detailed instructions to examiners relating to the operation of stock transfer departments in State-chartered banks.

New York State has also created a special automation unit whose employees are trained in special techniques for checking on transfer agents whose operations have been automated.

In the course of their examinations, examiners make recommendations for improvements in operations, and in doing so, they apply the principle that sound banking practices require that bank transfer agents and registrars act promptly and efficiently.

Our recommendation is that the banking agencies retain this responsibility.

The imposition of an additional layer of regulation by the Commission, limited to the stock transfer and registrar functions of a bank, would, at the very least, be a duplication and, at worst, confusing and disruptive.

Stock transfer and registration are only parts of the broad fiduciary, custody, and agency functions performed by banks.

Congress has traditionally deferred to the expertise of bank regulatory bodies because it recognizes that regulation of banks requires a balancing of various interests, including the solvency and integrity of the banking system.

We urge you not to adopt legislation which ignores the existence of a competent group of regulators who are in the best position to prescribe and evaluate standards of performance of bank transfer agents and registrars in the broader context of standards of sound banking practices.

We hope you will recognize that authority to regulate the internal operations of a bank, whether it be with regard to commercial lending, trusts, transfer agents, registrars, or any other function, should be left where it belongs with the appropriate bank supervisory authority.