APPENDIX II THE GENERAL COUNSEL OF THE TREASURY, Hon. HARRISON A. WILLIAMS, Jr., U.S. Senate, Washington, D.C. DEAR SENATOR WILLIAMS: Reference is made to your letter to the Comptroller of the Currency requesting comments on S. 2551, S. 3297 and S. 3412, currently before your subcommittee. S. 3412 and S. 3297 are designed to effect somewhat similar reforms in the present system of securities transfers. S. 3297 would require the registration of securities-clearing agencies subject to the supervision of the Securities Exchange Commission. S. 3412, sponsored by the SEC, is somewhat more far-reaching in that it would set up a system of registration of both clearing agencies and transfer agents. Further, S. 3412 would require the SEC, after consultation with the appropriate regulatory agencies, to establish minimum standards for the performance of transfer functions, measures and personnel standards for safe handling and custody of securities and funds, and operational compatability of the transfer agent with other persons in the securities handling process. The bill provides for the administration of these standards, and the requirements which it would establish pertaining to registration, by the federal bank regulatory agencies as to transfer agents which are banks, and by the SEC as to other transfer agents and as to all clearing agencies. The formal registration which S. 3412 would require of bank transfer agents with the appropriate federal bank supervisory agency would be largely superfluous, because it would not be necessary or even complementary to the existing system of on-the-spot supervision of these activities. If it is deemed essential, however, that the bill treat all transfer agents evenhandedly, regardless of their basic supervisory structure, we do not object. While the Department had been of the opinion that standards for transfer agents should be established jointly by the appropriate supervisory agencies, we have concluded, because of the strongly held conviction of the SEC that such a system would be unworkable, not to suggest an amendment of the bill in this regard. For the same reason, the Department has not suggested that the supervision of clearing agencies which are trust companies be conferred upon the appropriate federal banking agency. Further, we understand that the SEC has no wish to engage in such supervision of banks as this bill would confer any longer than as is necessary to meet the current stock transfer problems on an interim basis until a more comprehensive solution can be achieved. Accordingly, the Department will not object to S. 3412 and believes it to be preferable to S. 3297 because of its more comprehensive scope. We believe that S. 2551 embodies an imaginative approach to resolve in a reasonable manner the problems stemming from the basic inability to reconcile current means of evidencing ownership of securities with modern-day requirements and capabilities. A permanent solution to this problem must be devised and initiated in the near future, we believe. It would appear to us that such a solution must involve the elimination of the certificate of ownership. Thus, we approve of the end sought by S. 2551, to establish a certificateless means of securities ownership. We feel that such an endeavor should be subject to the guidance of the SEC, as the bill would require. Further, we are of the opinion that the solution of the numerous questions which would be involved with regard to the modifications of the existing relationships and functions of the many parties, which presently are intimately involved in the securities ownership and transfer process, should be subiect to the advice and direction of a group reflecting the viewpoint of these parties, such as the bill would establish in the National Commission on Securities Laws. Within the framework of the foregoing general propositions, we are uncertain at present as to whether the mechanism which S. 2551 would establish is the best possible means to resolve the problem, and suggest that the Committee give extensive study to this question; specifically, we believe that before another quasi-governmental corporation is established, the need for such an additional entity, rather than utilization of existing agencies, should be clearly established. Careful evaluation should be made of the potentialities of utilization of the SEC, or a combination of existing agencies, to perform the functions which the bill would place in the proposed National Securities Corporation. The Department has been advised by the Office of Management and Budget that there is no objection from the standpoint of the Administration's program to the submission of this report to your Committee. Sincerely yours, SAMUEL R. PIERCE, General Counsel. APPENDIX III Hon. HARRISON A. WILLIAMS, Jr., PERSHING & Co., INC., New York, N.Y., May 5, 1972. Chairman, Sub-committee on Securities of the Committee on Banking, Housing and Urban Affairs, U.S. Senate, Washington, D.C. DEAR MR. CHAIRMAN: In our attempt to respond to your invitation (letter dated 4/19/72) for comment on Bills S-2551, S-3297, S-3412, we have taken the following approach: The entire processing system for securities handling is poised for change. In fact, many changes are well underway. In the two reports you have received from BASIC, it is evident that substantial progress has been made. We believe that in the searching for ultimate goals the solid gains already made should not be overlooked, and in fact, should be studied as possibly pointing us in the correct direction. At the risk of covering too broad a field, we would make these observations. 1. A prompt resolution or, perhaps better, finalization of the CUSIP numbering system should be agreed upon. While CUSIP numbers are mandated for certain transactions, there is still doubt and hence reluctance to make a complete conversion. A standardized numbering system is an absolute essential to automation. The four standard forms proposed by BASIC and adopted by the industry represent progress. 2. CCS is performing well and its growth rate has important implications. With full Bank participation a hoped-for certainty in the near future (1–2 years). almost all institutional and broker to broker settlements will be by bookkeeping entry. We cannot see the need for regional depositories or regional clearing centers. Access to the expanded CSDS could be nationwide. Customers who insist on certificates should be made to pay costs related to this choice. CSDS should also become the transfer agent for securities held by it which would streamline this costly and time consuming step and place it under SEC scrutiny. If the sub-committee is truly determined to eliminate (i.e. immobilize) the certificate by 1976, then regional depositories are wasteful and talent diverting. The concept of a central depository should be worked out in conjunction with a "National" Stock Exchange system, with "locked-in” trade capability for all securities traded within the system. "Clearing" as we know it today will cease to exist. Automatic bookkeeping debits and credits would be entered on the appropriate settlement day. (Incidentally, settlement time should be considerably shortened.) 3. Sufficiently high standards of conduct and financial reliability must be introduced and maintained for any participant in either an expanded CSDS or National Securities system. You cannot have it both ways, i.e. easy access with subminimum capital ratios and requirements and proper protection of the public's cash and securities, particularly where automatic settlement is involved. 4. We heartily endorse the provisions of S-3297 which eliminates discriminatory state or local taxes. 5. While the goal of elimination of negotiable certificates is laudable, we do not feel a specified date as specified in S-3297 is appropriate nor do we feel 100% elimination is sufficiently practical in terms of cost to justify as an absolute goal. 6. We feel the SEC is the proper and best qualified governmental authority to oversee operation of the expanded CSDS. 7. Our inclination is to start with ownership of CSDS as presently proposednamely, the N.Y.S.E. and participating banks. It could later be determined if public (both governmental and participating public) representation were needed. We have no forgone prejudice either way. 8. We are concerned that S-2551 would unwind the real progress done by CCS and delay plans already moving in organizational disputes. 9. Bill S-3297, we believe, would make Pershing & Co. Inc. a "clearing" organization while Bill S-3412 would specifically exempt a clearing broker from registration. We feel that no additional regulatory requirements are needed and would concur with Bill S-3412. We hope our comments are helpful in your deliberations and appreciate the opportunity to express same. Respectfully yours, CARL W. TIMPSON, Jr., President. APPENDIX IV STATEMENT OF THE FIRST PENNSYLVANIA BANKING AND TRUST CO., BY CLEMENT J. GROODY, VICE PRESIDENT As the officer in charge of the Brokers' Division of The First Pennsylvania Banking and Trust Company, I make this statement to set forth our bank's position with respect to the future development of the securities depository arrangement in this country. Our bank firmly supports the depository concept as a means of eliminating the most serious problems that caused the failure of major securities firms in the "paper work crisis" of the late 1960's. We were one of the first banks outside New York City to participate in Central Certificate Service, when we became a pledgee bank in the collateral loan program established by CCS in 1971. Our people believe in the concept of regulation of the depository to strengthen its effectiveness and credibility and we think that S. 3297 proposed by Senator Williams, and the proposed Securities Transaction Processing Act of 1972, recommended by the SEC, contain provisions which will promote those objectives. In view of the number of divergent views expressed to the Subcommittee during the current hearings, we do not wish to burden the Subcommittee with extensive comments about these bills. We do, however, want to call to the attention of the Subcommittee a matter in which our views conflict with those of the Banking and Securities Industry Committee, or BASIC. The matter could have important future consequences to the securities industry, to the banking community nationally and ultimately to the interests of investors in general. BASIC has emphasized that securities depositories should be conducted under private ownership on a regional basis. We have no objection to regional depositories, but we think it unrealistic to conceive of Central Certificate Service as being a regional organization. In our view, CCS is, and by statute should be regarded as, an organization performing national rather than local functions. At the present stage of CCS development, it is impossible to predict what adverse effect the adoption of the regional ownership concept to CCS may have on relationships between banks outside the New York City area and members of the securities industry and upon the continuing availability of working capital to the securities industry. Accordingly, we urge that the enabling legislation which the Congress ultimately adopts should give the appropriate regulatory agency broad powers to require the representation of banks and other participants in all parts of the nation in the management and ownership of CCS and provide specific guidelines to that agency in determining how to exercise that power. The Securities and Exchange Commission has properly said that BASIC has made "important strides toward a modernized clearance, settlement and delivery system". We are sure that no member of the Subcommittee needs a detailed description of the significant accomp shments that the leaders of the securities industry and the New York banking community who formed BASIC have made in their efforts to achieve immobilization and possible elimination of the stock certificate. The members of BASIC have exercised what can only be described as statesmanship through their systematic efforts to correct the thorny practical and legal obstacles, and disagreements based on economic interest, which have stood in the way of that objective. Their investment of time, talent and funds in the program of establishing CCS as a national securities depository is an accomplishment for which the entire financial community will long be indebted. Nonetheless, we think that BASIC has erred in its views concerning the future stock ownership of CCS by banks. BASIC's announced concept of CCS calls for its ownership by the National Association of Securities Dealers, Inc., the New York Stock Exchange, the American Stock Exchange and the eleven banks that compose the New York Clearing House Association. In other words, BASIC would be owned by a consortium representing the securities industries nationally and the banking industry only locally. |