distinct from the present situation of sole ownership and management by securities exchanges, as good as that may be, and sole regulatory supervision by the SEC). It is a practical necessity that banks participate fully in any system of depositories if it is to become fully effective in reducing the physical movement of certificates. This is why BASIC has proposed that the New York depository be incorporated as a New York trust company under the supervision of the New York State Banking Department. Making depositories look and act like banks or trust companies seems essential if fiduciaries are to be persuaded to relinquish custody of securities entrusted to them.

5. New York State Transfer Tax questions.-Legislation has been introduced in the New York State legislature to eliminate a potential uncertainty created by the possible application of the New York State Transfer Tax upon deposit of securities from out-of-state with a New York depository, or transfer of securities on the books of a New York depository even though the purchase and sale took place outside of New York State. Discussions on this point have been held with the New York State Tax Commissioner who has issued a "no objection" letter to the legislation in question. During the quarter, discussions were held with the Fiscal Administrator of New York City (the beneficiary of this tax) who has also stated that he would raise no objection. The pending bill has now been approved by the Senate Committee on Taxation.

6. Depository as a trust company. We have previously reported the intent to incorporate CCS and then CSDS under the Banking Law of the State of New York. A step in this direction was the previously reported action of the New York State Banking Board on November 3, 1971, making a New depository eligible to apply for a charter as a New York State trust company, and bringing it under the regulatory supervision and examination of the New York State Superintendent of Banks. On March 31, 1972 the New York depository, CCS, presented drafts of an organization certificate, a notice of intention to organize a trust company, and a memorandum in support, to the Superintendent of Banks of the State of New York.

To facilitate and expedite the separation of certain functions as between CCS and Stock Clearing Corporation, of which CCS is now a division (the Stock Clearing Corporation is 100% owned by the NYSE), the NYSE has filed papers to incorporate CCS as a New York business corporation. The transfer of assets and operations from this business corporation to the trust company would come later when the latter's charter is approved.

The SEC and the New York State Superintendent of Banks have been informed of these two steps.

7. NYCSDS implementation group.-The last report referred to the eight-man full-time implementation group that had been formed to study and recommend solutions to the many practical problems involved in, first, transferring CCS operations into CCS Inc. as a separate wholly-owned subsidiary of the NYSE and, second, to spin off CCS Inc. into NYCSDS as an entity divorced from NYSE operations.

During the quarter, this group completed its studies and has disbanded.

8. Communications technology.—It was pointed out in the previous report that, at the present time, instructions and other communications to CCS are, with one exception, by the printed or written word. In the early stages, this will probably be true of all comprehensive securities depositories. However, there is no doubt that communications between depositories, and between each depository and its depositors, should be based upon modern, fast communication technology.

The Ad Hoc Communications Committee appointed by BASIC submitted its report during the quarter, a copy of which is attached (Exhibit H). The report deals with the concept and feasibility of connecting depositories with existing and planned wire networks in the banking and securities industries. This report is being distributed widely for comment. It is hoped and believed that the report will expedite the inevitable transition to advanced communications systems by depositories and depositors.

9. CCS rule changes.-Rule changes submitted by the NYSE to the SEC were cleared by the Commission during the quarter.

Seventeen out-of-state banks are now participating in the CCS collateral loan program as pledgee banks; as of December 31, 1971 there were 9 such banks so participating. Participation of banks in this program has been approved by the Federal Reserve, the Comptroller of the Currency and the New York State Banking Department. The enlargement of this program facilitates the ability of broker/ dealers to negotiate or rearrange loans.

Amendment of the rules permits a broader range of participants within CCS. Technically, this involved the creation of an affiliate member category and the expansion of the associate member category of Stock Clearing Corporation memberships. Heretofore, the only parties eligible to utilize all aspects of the depository system-with particular emphasis on the ability to leave shares (long positions) therein, in order to realize the goal of stock certificate immobilization-were members of the New York and American Stock Exchanges. Under the amended rules, domestic banks, foreign banks, investment companies, and regional stock exchange clearing corporations will all be able to engage in the normal business activities of receiving, delivering, and safekeeping of shares, all within the depository's electronic bookkeeping system. The daily physical movement of certificates traditionally associated with these collateral loan activities will be sharply reduced or eliminated.

Objections to certain of the proposed rules were originally raised by both the NASD and the Midwest Stock Exchange and you received copies of their letters. They were concerned that, by virtue of their joining CCS, the New York Stock Exchange indirectly would gain jurisdiction over their clearance activities in general. Through an exchange of letters this issue was laid to rest. The NYSE explained that the rules were intended to apply only to activities following a trade effected on the floor of the New York Stock Exchange or under NYSE rules. By definition, therefore, the Midwest Exchange would retain full selfregulatory jurisdiction as to the clearance and settlement of those transactions emanating from trades made on its own floor or under its rules, as would the NASD as regards OTC trades.

In addition to this point, there was also some concern on the part of the NASD over still another proposed Stock Clearing Corporation rule provision which would have extended all of the depository's benefits directly to NASD broker/ dealers (this "NASD broker/dealers category was in addition to the other broad new range of participants described above). This provision was deleted from the new rules, however, specifically at the request of the NASD until it has decided as to the method of interface between its clearing system and the depository. Toward that end, an interface study was begun between CCS and the NASD in February 1972; it is anticipated that concrete results will be forthcoming in the near future.

The foregoing problem of which you were aware will soon become academic. As CCS, Inc. becomes a separate corporation, and not a part of the Stock Clearing Corporation, implied application of the rules of SCC will be eliminated.

10. CUSIP. In 1970 BASIC recommended to the banking and securities industries that the CUSIP numbering system, developed over a period years by the American Bankers Association and designed to provide a universal numbering system for processing securities, be adopted for their internal systems. In January 1971 the banking and securities industry organizations represented on BASIC agreed that the use of the CUSIP system by their members would be mandatory after April 1, 1972. The following attached Exhibits indicate some of the steps taken to implement the CUSIP program.

Exhibit I-American Stock Exchange Clearing Corporation communication to clearing members dated March 3, 1972.

Exhibit J-NASD communication to its members dated March 7, 1972. Exhibit K-New York Stock Exchange's Stock Clearing Corporation book, dated October 1, 1971, for clearing members, associate members and non-member banks.

Exhibit L-Midwest Stock Exchange communication to its member firms dated March 16, 1972.

Exhibit M-Communication of New York Clearing House dated March 30, 1972. 11. Uniform forms.—The previous report referred to BASIC's recommendation (attached as Exhibit N) that four widely used forms be made uniform-the Transfer Instruction, Delivery Ticket, Comparison, and Reclamation Form. Use of the revised forms is to be mandatory by September 1, 1972 for two of the forms, and December 1, 1972 for the others, through action taken by the NASD, jointly by the NYSE and AMEX and the New York Clearing House Association. Exhibits O, P and Q set forth the communications from these respective organizations to their members.

During the quarter, 10,000 copies of the booklet discussing and giving specifications for these forms were distributed by BASIC, 5,000 by NASD alone, and the remainder to hundreds of financial organizations of all types throughout the country.

12. Standards for machine language transfer instructions.-A prospect of enormous potential in alleviating the paperwork problem turns on securing agreement among automated broker/dealers, banks, transfer agents, and depositories on exact specifications for maintaining name and address files in computers. If this could be done, withdrawals-by-transfer from a depository by automated brokers and banks without human intervention would be brought much closer to reality.

The bank or broker originating transfer instructions would enter from its computer to magnetic tape the name and address (ultimately, mostly individuals) in which new certificates are to be issued, the CUSIP number of the security, the number of certificates required and the shares for each. The originator would send this tape to the depository as an authorization to withdraw the covered securities, and as the transfer instruction. The depository, after checking that the covered securities were on deposit, would have its computer regroup by issue on new tapes-the taped instructions from all depositors, and send these tapes to the respective transfer agents along with a depository nominee certificate to be "split." The transfer agent would use the tape in his computer to update stockholder records and print the required certificates.

No paperwork. No human hands intervening. Large savings of time and

expense.

BASIC has formed an Ad Hoc Transfer Standards Committee to pursue this subject of transfer standards, especially the difficult name and address portion. Membership comprises computer and systems experts from 3 bank transfer departments, 3 brokerage firms, 2 corporate transfer departments and 2 from NYSE (for CCS). 2 members of BASIC's Task Force are participating. The group is meeting regularly and is optimistic that the desired standards can be formulated.

13. COD DK's.-Under date of December 23, 1971, we forwarded to the staffs of the Federal Reserve Board and the Securities and Exchange Commission the recommended solution to the COD DK problem unanimously endorsed by BASIC. Certain elements of the solution will require regulatory action by the FRB, the SEC, or both.

During the quarter, we received a request from the staff of FRB for additional copies of the material originally sent. To date, we have heard of no further developments within the agencies on this matter.

*

In closing, I would again urge your Committee to encourage prompt development of a system of interconnected regional depositories, user-owned and operated. Your support for this program could accelerate it.

If you have no objection, I should be glad to have this letter and its Exhibits made a part of the record. I enclose two copies thereof and to save your staff the trouble I have sent two copies of this letter and of the Exhibits to each member of your Committee.

Should you wish to discuss any part of this report, Mr. Bevis and I would welcome the opportunity to do so at your convenience.

I beg to remain,

Respectfully yours,

EXHIBIT A

JOHN M. MEYER, Jr.

PERMANENT EDITORIAL Board for the UNIFORM COMMERCIAL CODE,
Philadelphia, Pa. February 23, 1972.

HAMILTON F. POTTER, Jr., Esq.,

Sullivan & Cromwell,

New York, N.Y.

DEAR MR. POTTER: I am writing to advise you that the Permanent Editorial Board for the Uniform Commercial Code has adhered to the position that it favors the enactment of the amendment to Section 8-102 (3) proposed by BASIC.

You are of course free to use this communication in any appropriate way since the position of the Board will not be published officially until the occasion arises for a further report on amendments.

Yours faithfully,

HERBERT WECHSLER,

Chairman.

Mr. HERMAN W. BEVIS,

EXHIBIT B

SECURITIES INVESTOR PROTECTION CORP.,
Washington, D.C., February 1, 1972.

Executive Director, Banking and Securities Industry Committee, 84 William Street, New York, N.Y.

DEAR MR. BEVIS: This will acknowledge receipt of your letter of January 20 with reference to BASIC's program for amendments to the Uniform Commercial Code which will make possible more widespread use of securities depositories for the purpose of effecting deliveries of securities by book-entries.

SIPC wishes to express its concurrence with and support of these objectives. As you know, SIPC is a nonprofit membership corporation created by the Securities Investor Protection Act-a Federal statute which became effective December 30, 1970. Its primary purpose is to provide a measure of protection for the customers of broker-dealer firms which encounter financial difficulties and must be liquidated.

The statute provides that all persons registered as brokers or dealers under the Securities Exchange Act of 1934 and all persons who are members of a national securities exchange (other than persons whose business is confined to one or more of four specified areas) shall be members of the corporation.

The company is managed by a board of seven members, five of whom are appointed by the President with the advice and consent of the Senate, one is appointed by the Board of Governors of the Federal Reserve System and one by the Secretary of the Treasury. Three of the aforementioned five are appointed from the securities industry and two are appointed from the general public.

The statute requires that SIPC shall establish a fund which within 120 days of enactment should amount to not less than $75,000,000, which might consist of cash, United States government or agency securities and confirmed lines of credit. The fund is to be built up to an aggregate of $150,000,000 or such other amounts as the Securities and Exchange Commission may determine in the public interest. In order to provide for this fund, assessments, currently at the rate of 1⁄2 of 1 percent of the gross revenues from the securities business, are paid by SIPC member firms in accordance with the provisions of the statute. After the fund reaches its intended size, the assessment rate may be varied as SIPC may provide by bylaw or rule. In the event of a crisis in which the SIPC fund should prove inadequate SIPC, with the approval of the Securities and Exchange Commission, may borrow not to exceed $1 billion of U.S. Treasury funds through the Commission.

In the event a member firm encounters financial difficulty and if SIPC determines that the member has failed or is in danger of failing to meet its obligations to customers, SIPC may under certain conditions specified in the Act apply to a Federal court for the appointment of a trustee. If the application is granted the trustee, under the supervision of the court, will proceed to return specifically identifiable property to customers entitled thereto, distribute the single and separate fund and in connection therewith pay customers money advanced by SIPC, operate the business in order to complete certain open contractual commitments of the debtor, and liquidate the firm. If necessary SIPC, in order to provide for prompt payment of customer's claims, may advance funds to the trustee not to exceed $50,000 per customer except that insofar as a claim of a customer is a claim for cash, as distinct from securities the advance shall not exceed $20,000. As of the end of 1971 the SIPC fund amounted to approximately $90,000,000 including a confirmed line of credit of $65,000,000. At present SIPC trustees are engaged in the liquidation of thirty broker-dealer firms.

The SIPC legislation was developed during 1969 and 1970 when the securities industry encountered serious operational and financial problems as a result of which many firms failed or disappeared by reason of merger, reorganization, sale or voluntary liquidation. Many of the industry's problems then and now result from complexities of record-keeping and the difficulties arising from a cumbersome and archaic system for the physical movement of certificates for delivery and transfer.

To the extent that increasing use can be made of the central depository system with transfers effected and evidenced by book entries, risks of lost securities and operational costs should be reduced and efficiency should improve. To the extent

that physical handling of securities and attendant operational problems have been or might become material elements in broker-dealer failures their reduction is in the public interest and should operate to lessen to some extent the risk of a draw on SIPC funds and the U.S. Treasury.

Accordingly, the effort now being made by BASIC and others looking toward the "immobilization" of the stock certificate under a depository system with appropriate safeguards should make possible substantial improvements in operational procedures and, hopefully, the officials and legislatures of the states will cooperate to secure the necessary enabling legislative amendments.

Senate Chamber, State Capitol, Albany, N.Y.

DEAR MR. CHAIRMAN: As you know, the Commission is keenly interested in furthering the immobilization of certificates in comprehensive securities depositories in order to increase the number of securities transactions that are accomplished by book-entry as opposed to the physical delivery of certificates.

One of the ways in which the desired expansion of depositories can be furthered is to broaden eligible ownership beyond that presently permitted by the Uniform Commercial Code (which restricts ownership to "A national securities exchange or association registered under a statute of the United States such as the Securities Exchange Act of 1934"). It has come to the Commission's attention that amendment (S-7280) to Section 8-102 (3) is pending before the New York State Legislature the purpose of which would be to broaden eligible owners to banks, insurance companies, brokers, dealers, and investment companies. We think that the passage of this amendment would substantially further a solution to this country's problem of processing securities transactions, and urge its adoption.

We are informed that there is also pending a proposed amendment (S-7281) to the New York Estates, Powers and Trusts laws which would have the effect of permitting fiduciaries to deposit fiduciary securities in a comprehensive securities depository. The inclusion of fiduciary securites in a depository would be of valuable assistance in a comprehensive approach to the processing of securities transactions.

Sincerely,

EXHIBIT D

WILLIAM J. CASEY, Chairman.

COPY OF RESOLUTION ADOPTED BY THE TRUST DIVISION OF THE AMERICAN BANKERS ASSOCIATION ON FEBRUARY 7, 1972

"The Trust Division recommends the American Bankers Association adopt the following policy on legislation, regulation and industry action relative to the paper work problem of the securities industry.

1. The Association supports the depository concept for immobilizing stock certificates with a view towards its elimination to the maximum extent practicable.

2. The Association supports the efforts of the National Coordinating Group for Comprehensive Securities Depositories to establish a private depository system, including the concept of the two proposed state statutes recommended by BASICone to amend estate and trust to allow the placing in depositories of securities held in a fiduciary capacity and the other to amend existing law or enact new law to allow clearing corporations (depositories) to be owned by participants other than stock exchanges."