HAMILTON F. POTTER, Jr., Esq., Sullivan & Cromwell, ATTACHMENT F PERMANENT EDITORIAL BOARD FOR THE UNIFORM COMMERCIAL CODE, 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 You are of course free to use this communication in any appropriate way since the position of the Board will not be published officially until the occasion arises for a further report on amendments.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. ATTACHMENT G FROM THE AMERICAN BANKERS ASSOCIATION'S TRUST LETTER, OF FEBRUARY 18, 1972 A.B.A.'s position: The American Bankers Association supports the depository concept for immobilizing stock certificates with a view towards its elimination to the maximum extent practicable. This statement is part of a general policy on legislation, regulation and industry action relative to the paper work problem of the securities industry. A.B.A. endorses the efforts of the National Coordinating Group for Comprehensive Securities Depositories to establish a private depository system. The Association supports the concept of two proposed state statutes recommended by BASIC-one to amend estate and trust law 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. The SEC has urged the adoption of the latter measure to broaden eligible ownership of depositories to banks, insurance companies, brokers, dealers and investment companies. SEC Chairman William J. Casey outlined the Commission's stand on such a bill proposed in the New York Legislature. The Securities Industry Protection Corp. also supports it. The legislation has been recommended to all 50 states. Copies of the measures are available from the A.B.A. Trust Division, 1120 Connecticut Avenue, N.W., Washington, D.C. 20036. ATTACHMENT H RESOLUTIONS ADOPTED FEBRUARY 7, 1972, BY THE AMERICAN RANKERS ASSOCIATION 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 cencept of the two proposed state statutes recommended by BASIC-one to amend estate and trust law 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. 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 registerd 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 amount 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 customers' 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. Sincerely, BYRON D. WOODSIDE, Chairman. Hon. JOHN E. Moss, ATTACHMENT J SECURITIES INDUSTRY ASSOCIATION, Chairman, Subcommittee on Commerce and Finance of the Committee on Interstate and Foreign Commerce, Rayburn House Office Building, Washington, D.C. DEAR CHAIRMAN Moss: I am writing as Chairman of the Securities Industry Association, the new trade association for the securities business, to apprise you of a recent action of our Board of Directors which, at its meeting on February 5, 1972, considered and endorsed the creation of a privately-owned comprehensive securities depository system. In our view this would be a highly desirable step toward the effective resolution of the certificate handling challenge that faces our industry. We support the current efforts of the National Coordinating Group for Comprehensive Securities Depositories and the Banking and Securities Industry Committee (BASIC) to develop such a system, and we will encourage our members to support those efforts as well. As you may know, our members are also members of various of the stock exchanges and the NASD. They represent the vast majority of the brokerdealer users of the NYSE Stock Clearing Corporation, the Central Certificate Service, the Pacific Coast Stock Exchange Clearing and Depository organizations, the Midwest Stock Exchange clearing organizations, and National Overthe-Counter Clearing Corporation. They will also be major users of the forthcoming National Clearing Corporation of the NASD. Looking to the future, it is our hope that competition between these various entities can be eliminated insofar as clearing and depository services are concerned. This would have the beneficial result of avoiding duplication of facilities and disparity of systems. We believe firmly that a fully coordinated user-owned and user-controlled network of depositories and clearing facilities is in the interest of the firms of this Association and its institutional and individual clients. We are delighted that BASIC in the area of its concentration has accepted the concept of user-owned and operated depositories both regionally and in New York. If legislative changes are necessary to accomplish BASIC's goals, we pledge to put our regional district organizations with their local legislative expertise and contacts at its disposal. We plan also to appraise BASIC and the chairman of the Senate committee of this action by our Board. Sincerely yours, KENNETH STEPHENS, Esquire, ROBERT M. GARDINER, DELAWARE BAR ASSOCIATION, Senate Banking Committee, New Senate Office Building, DEAR MR. STEPHENS: Confirming our telephone conversation, I enclose Mr. Stargatt's correspondence on the day you mentioned plus additional correspondence which Mr. Stargatt had which might illuminate the matter. I might say that Mr. Stargatt expressed this concern more than any other member of the Subcommittee and I believe that certain other members felt that the dangers which Mr. Stargatt saw were not likely as a practical matter. Nevertheless, it is well for you to have the full correspondence rather than an abbreviated form. DEAR MR. CASEY: Thanks for your courteous letter of February 11. I do note your submission that "[t]he Commission possesses authority to regulate securities depositories...". It had been in my mind that the Commission's au thority to regulate clearing corporations was a derivative of its authority to regulate national securities exchanges. Hence it was the apprehension of some members of our Committee that if clearing corporations were allowed to be owned entirely by (hypothetically) insurance companies, they would be beyond the Commission's reach. And while we understand that efforts will be made to obtain "additional authority" for the Commission, I suppose there is no certainty that Congress will legislate in line with the Commission's request. My own reaction is that the idea of putting a special provision in Delaware's amendment to Section 8-102 (3) of the UCC to accommodate our concern about regulatory jurisdiction would not be attractive to our Committee. A principal virtue of the Code is its uniformity. So if there is merit to our regulatory concern it will likely be shared by Professor Wechsler's Permanent Editorial Board. I am taking the liberty of sending a copy of our correspondence to Professor Wechsler, with whom I have been in prior contact, so that his Board will be kept informed. For myself, now that the problem has been flagged, I will be content with whatever the decision of Professor Wechsler's Board on the BASIC proposal. Sincerely, BRUCE M. Stargatt. Hon. WILLIAM J. CASEY, YOUNG, CONAWAY, STARGATT & TAYLOR, Chairman, Securities and Exchange Commission, DEAR MR. CASEY: The Delaware Bar Association's Stock Certificate Subcommittee has been considering the merits of a proposed amendment to Section 8-102 (3) of the Delaware version of the Uniform Commercial Code. There has been uneasiness about the BASIC proposal expressed during Subcommittee meetings principally because the BASIC proposal allows for the possibility of clearing corporations being owned and operated by entities not subject to the jurisdiction of your Honorable Commission. A copy of my letter of January 5, 1972 to Professor Herbert Wechsler, Chairman of the Permanent Editorial Board for the Uniform Commercial Code, briefly expressing our concern, is enclosed. Also enclosed is a copy of a letter from Hamilton Potter (counsel to BASIC) dated January 27, 1972 to Professor Wechsler expressing BASIC's viewpoint. Finally, I am transmitting the letter being sent by me today to Professor Wechsler. Of particular interest to me is your letter of January 20, 1972 giving the SEC's blessing to BASIC's proposal. My major concern centered on the proposition that the proposed amendment could give rise to the creation of a clearing corporation not subject to the jurisdiction of the Commission. I think this could be dangerous. I would be most appreciative if you could take a few minutes to advise me as to why you disagree-if you disagree. Respectfully, BRUCE M. STARGATT. Prof. HERBERT WECHSLER, YOUNG, CONAWay, Stargatt & TAYLOR, January 5, 1972. DEAR PROFESSOR WECHSLER: The Subcommittee on Stock Certificates of the Delaware Bar Association Corporation Law Committee has before it a proposed amendment to § 8-102 (3) of the Uniform Commercial Code, the effect of which is to redefine a "clearing corporation" to include corporations owned by banks and/or insurance companies. The present law requires that such corporations, to qualify for the Code definition, be owned by a national securities exchange subject to federal regulation. It is assumed that the current Code requirement was the product of a policy decision on the part of the draftsman to require that the "clearing corporation" be subject to federal supervision. There is, of course, at least arguable merit for such a policy. The proposed amendment allows of the possibility that a clearing corporation may be owned by a group of insurance companies subject to either loose or nonexistent state supervision. It may be that the malaise felt by some of the members of our Subcommittee (particularly me) at this possibility is baseless. However, I did want to make sure that the subject was raised with your Committee. Hamilton F. Potter, Jr. of Sullivan & Cromwell, a proponent of the proposed amendment to the Code has told us at a luncheon meeting today that the proposed amendment has been submitted to you and your counsel, Carl Funk, and that he believes it has been well received by the members of your Committee. (I believe he said that all the members who have been heard from have reacted favorably, and that only one alternate has suggested that the amendment be presented for approval to your meeting in May). So it may be that this letter comes too late. However, if the horse is not already out of the barn, it would be much appreciated if we might have the benefit of your Committee's wisdom on the possible criticism that the proposed amendment is deficient in allowing the new "clearing corporation" to be entirely owned by companies not subject to federal regulation. Very truly yours, BRUCE M. STARGATT. YOUNG, CONAWAY, STARGATT & TAYLOR, February 4, 1972. HERBERT WECHSLER, Professor of Law, Columbia Law School, Columbia University, DEAR PROFESSOR WECHSLER: Hamilton Potter was kind enough to send me a copy of his letter to you of January 27. The drift of Mr. Potter's submission runs this way: Because the to-be-created clearing corporations are likely to be run and used by big business, because the owners will be subject to at least some state regulation, because each clearing corporation will practically be interdependent on other clearing corporations, and because there is current federal interest in the concept and possible federal legislation on the burner, BASIC's proposed amendment to Section 8-102 (3) should be favorably considered. Speaking for myself (our Delaware Subcommittee hasn't considered Mr. Potter's letter), I disagree. Here's why. When Section 8-102 (3) was originally adopted it seems clear that the reason for requiring that the clearing corporation be owned by a registered exchange was to make sure that so important a function was not beyond the bounds of federal regulation. That policy made good sense twenty years ago, and makes no less good sense today. I well understand (and do not disagree with the argument) that banks, particularly, ought to be allowed to participate in clearing corporation ownership. But I cannot bring myself to jump from this undisputed premise to a conclusion supporting BASIC's amendment, allowing as it does a clearing corporation to be entirely owned by businesses not subject to federal regulation. It seems to me to be no answer that the federal government may ultimately succeed in legislating the regulation of clearing corporations. While it's true that there's been interest reported in that direction, the interest is now but at the political threshold. Indeed I'd not be at all surprised to find BASIC itself opposing, for reasons which it might well find good and sufficient, whatever statute is finally proposed. Nor does it seem to be persuasive to say that the entities involved in a clearing corporation will probably be large, will likely not commit a fraud, and will be subject to state regulation. Without meaning to derogate the regulatory bodies of any state, it is unreal to fail to recognize that some are better and some are worse.. and some worse than that. The idea of somebody being able to set up a UCC-blessed clearing corporation by creating five insurance companies incorporated and under the jurisdiction of a friendly insurance commissioner appeals to me not at all. By way of tack-on, I am now in receipt of a letter dated January 20, 1972, from William J. Casey, Chairman of the Securities and Exchange Commission, |