APPENDIX I Report of the Banking and Securities Industry Committee ("BASIC") for the three months ending March 31, 1972, together with Exhibits A-Q BANKING AND SECURITIES INDUSTRY COMMITTEE, Hon. HARRISON A. WILLIAMs, Jr., New York, N.Y., April 12, 1972. Chairman, Subcommittee on Securities of the Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, D.C. Dear MR. CHAIRMAN: BASIC Progress Report-First Quarter 1972, Second Report. SUMMARY Since January 1, 1972.—1. In the first quarter of 1972 Central Certificate Service (CCS) handled 2,230,184 transactions by book entry, up 34% from the fourth quarter of 1971. In addition, CCS has increased by 7.5% to 2,761, the number of listed and unlisted issues eligible for deposit. 2. The National Coordinating Group for Comprehensive Securities Depositories, composed of members from Chicago, New York and the West Coast, has held two more meetings. Questions involving inter-depository relationships have been identified and research commenced. Interest in regional depositories, and studies about them, have spread. 3a. The amendment to the Uniform Commercial Code (UCC), necessary to permit broader ownership of depositories, has become law in 2 states, has been introduced in 9 states, and introduction is anticipated during 1972 in 5 others. b. The present status of the proposed amendment to the UCC is: Enacted: two, Virginia and Kentucky. Introduced: Nine, California, Delaware, Hawaii, Maryland (passed by both houses), New York (passed by one house), Ohio, Rhode Island, South Carolina, and West Virginia. Introduction anticipated for 1972: Five, Illinois, Louisiana, Michigan, New Jersey, and Pennsylvania. Introduction probable in 1972: Massachusetts. Introduction anticipated for 1973: 15 States. 1973 introduction supported by industry association or Bar committees: Four States. Total 36 States. Insufficient information to permit present evaluation : 14 States. Total 50 States. 4. Amendments to fiduciary laws with respect to the deposit of fiduciary-held securities in depositories were introduced during the 1972 session of the New York and California State legislatures. The amendment BASIC proposed has been passed by the New York Senate. 5. Our previous report referred to a needed amendment to the New York State Transfer Tax law. The New York State Tax Commissioner has issued a "no objection" letter to the proposed amendment. A bill effecting the amendment has been introduced to the New York State Legislature and the Senate Committee on Taxation has reported it favorably. 6a. A draft application to incorporate "CCS"-the New York depository presently owned by the NYSE-as a trust company has been presented to the Superintendent of Banks of the State of New York. b. To facilitate and expedite the transition of CCS to its ultimate form as a New York trust company and the separation of functions between Stock Clearing Corporation and CCS, the NYSE has filed papers to incorporate CCS as a New York business corporation wholly owned by the NYSE. 7. The eight-man implementation group formed to recommend steps necessary or desirable to effect the transition from CCS to the ultimate New York CSDS has completed its work. 8. The Committee of communications experts completed its report on the feasibility of connecting existing and planned wire networks in the two industries with a depository system. 9. Rules changes proposed by Stock Clearing Corporation for CCS to expand the number of its eligible depositors to include organizations in and outside of New York City have been approved. 10. Widespread use of the CUSIP number became mandatory on April 1, 1972. 11. Joint industry use of the four uniform forms that are most widely used in processing securities transactions (other than brokers' confirmations) as recommended by BASIC has been adopted by the NYSE, AMEX, NASD and New York Clearing House banks. BASIC has received requests for and has sent out over 10,000 copies of such forms. 12. An ad hoc group of experts has been formed to develop standards for machine language transfer instructions which, if successful, could have significant impact on clerical work in transfers of securities. 13. BASIC's solution for the so-called "COD DK" problem continues under consideration by the FRB and SEC. On Friday, October 1, 1971, Mr. Herman Bevis, the Executive Director, and I as Chairman of the Banking and Securities Industry Committee (BASIC) appeared before your Committee in connection with "Hearings on Problems Associated with the Handling of Stock Certificates." During this hearing you requested BASIC to report to you quarterly. We gladly agreed to do so. This letter is the second of such reports and will be an outline of progress made during the first quarter of 1972. 1. Expansion of CCS.-You will recall that a major objective of CCS, which BASIC has been encouraging, is the expansion of the present Central Certificate Service. From January 1 to March 31, CCS has added, on a gross basis, 201 additional issues of securities to those previously eligible for deposit, thereby increasing the number of transactions which may be settled by book entry rather than by physical delivery of securities. Of these 201 additional issues: The weekly increase in additional issues of securities to those previously eligible for deposit will be temporarily disrupted during the forthcoming move of CCS to new quarters. As of March 31, 1972 the shares of 2,761 different issues were eligible for deposit, of which: This figure of 2,761 represents a net increase of 189 issues, or 7.5%, from December 31, 1971 after giving effect to a decrease of 12 issues resulting from mergers and delistings. As of March 31, over 1.2 billion shares were on deposit, compared with some 1 billion shares at the beginning of the quarter. The book entry operations of CCS for transfer of stock certificates are continuing to expand and to further reduce the physical flow of paperwork: -In the last quarter of 1971 CCS handled 1,653,072 transactions by book entry with a value of $27.1 billion, all without the physical movement of stock certificates. -In the first quarter of 1972 the comparable respective figures were 2,230,184 and $39.9 billion. -Two transfer agents in New York City estimate that the number of certificates processed by them in the first quarter of 1972 was approximately 25% less than in the first quarter of 1971 due to the increasing number of CCS book entries and to the increasing use of "jumbo" stock certificates even though the NYSE volume in the first quarter of 1972 was in excess of that for 1971. 2. National system of regional depositories.-Evidence continued to accumulate during the quarter that there is almost no inter-industry difference with the proposition that a nationwide system of user-owned, interconnected regional depositories is needed to speed the accurate completion of securities transactions. This has been evidenced in the meetings of the National Coordinating Group for Comprehensive Depositories, the composition of which was given in the previous report. The agenda of the third meeting of that group, held on April 4 in San Francisco, identified specific questions about inter-depository relationships and interconnections that exist and called for the members to start resolving them. The Chairman of the Group expects to report to you shortly on these and other matters. During the quarter, an inter-industry task force in California completed an in-depth report on the construction of a CSDS in California, received acceptance of its recommendations from a Policy Committee made up of chief executives of banks, brokers, and exchanges; implementation has commenced. An inter-industry group from Canada spent several days in the New York financial community, including one day each with CCS and the BASIC Task Force, on the planned Canadian securities depository system. This group has just issued an extensive report. The Chairman or Executive Director of BASIC, or both, met during the quarter with representatives of the P-B-W Stock Exchange and the Philadelphia Clearing House banks, in Philadelphia; two bankers from Omaha: a banker from Pittsburgh; and a consultant to the Boston Clearing House banks. All of these discussions were about the regional depository plan. These meetings were in addition to the standing monthly meetings with representatives of the Boston, California, Chicago, Hartford and Philadelphia financial communities and to the regular monthly meetings of the seven members of BASIC plus alternates, staff, counsel and the General Manager of the New York Clearing House. These inter-industry and regional discussions have emphasized the plan of making available the facilities of each regional depository to each other and to those of other ones if and when formed. They have emphasized that depositors in any depository should include NASD, securities exchanges (or their clearing corporations), broker/dealers, banks, investment companies, insurance companies and any other responsible regulated financial organization. 3. Changes in state UCC laws.-You will recall from the previous report that, to accomplish the important step of enabling banks, insurance companies and investment companies to participate in the ownership and management of a depository, a section of the UCC must be amended. This amendment wou'd permit capital stock of a securities depository to be held, in addition to present eligible owners, by persons (other than individuals) each of whom (i) is subject to supervision or regulation pursuant to the provisions of federal or state banking laws or state insurance laws, or (ii) is a broker or dealer or investment company registered under the Securities Exchange Act of 1934 or the Investment Company Act of 1940. This technical amendment to the UCC was endorsed by the following persons during the quarter: Permanent Editorial Board for the Uniform Commercial Code (Exhibit A) The Chairman of the Securities and Exchange Commission (Exhibit C) American Society of Corporate Secretaries (Exhibit F) New York Statet Bankers Association (Exhibit G) Subsequent to our initial request to officials (in most cases securities commissioners or persons in equivalent capacities with other titles) in all fifty states to arrange the introduction of the amendment in their respective states, all such persons and others have been contacted several times. The responses to date have been encouraging as evidenced by the following summary which bears out the preliminary favorable reactions which we received. STATUS OF UNIFORM CODE REVISIONS Favorably received; introduc- Introduction supported by State and number of NYSE listed companies incorporated therein Kentucky (5), Virginia (25). California (70), Delaware (567), Hawaii (4), Maryland (passed by Alaska (1), Colorado (6), Georgia (9), Indiana (23), Maine (13), Alabama (1), Arizona (4), Arkansas (0), Idaho (0), Kansas (8), The figures in parenthesis alongside state names indicate one measure of the relative progress made in obtaining each state's amendment of the UCC so as to permit transfer of title to securities by entries on the books of depositories not wholly owned by national securities exchanges. These figures, broken down by the categories designated above and as a percentage of the incorporations within the 50 states of NYSE listed companies, are as follows: 4. Changes in state fiduciary laws.-As was previously reported, amendments to the fiduciary laws of most States will be necessary to enable fiduciaries to deposit securities in a depository. Amending legislation was introduced during the quarter in the New York State legislature and has passed one house. Similar legislation has been introduced in the California legislature. The amendment to the New York State law has been endorsed or favorably commented on by: -The Chairman of the Securities and Exchange Commission (Exhibit C) -The New York State Bankers Association (Exhibit G) -Orally by the Executive Committee of the New York State Surrogates Association In contrast to the UCC, fiduciary laws vary from state to state. We have sent copies of the material that is being used in New York to amend its fiduciary law to the American Bankers Association and to a large number of appropriate persons in all states, as an example or as a possible guide. Bankers and other fiduciaries in a number of states are studying their fiduciary laws to identify those which will require change. Amendment of state fiduciary laws is complicated. Most state legislatures, before framing and passing such amendments, will need constructive initiative and positive endorsement by the fiduciaries, principally the banks, that are located in the respective states. It is already clear that before depositories can attract banks and insurance companies as depositors, their ownership, management, examination and regulatory supervision must more closely resemble those of fiduciary institutions (as |