tion of quotations for over-the-counter securities for all market makers regulated by NASD. Over 6 million shares of stock are traded through the NASDAQ system daily, which exceeds the combined volume of all the exchanges in the nation with the exception of the New York Stock Exchange, which is trading up to 20 million shares a day.

Now NASD is presently studying methods by which NASDAQ can be interfaced into their new CNS method which is operated by NASD's National Clearing Corporation (NCC). In turn, they are working with BASIC in the hope of interfacing with BASIC's securities custody and inventory accounting systems. Again, one of the goals is to immobilize the stock certificate.

Yet, how reliable are computers?

Mr. John Cunningham, Director of Financial Services for Arthur Young and Company, a national firm of certified public accountants, has stated that the elimination of the handling of securities can resolve many financial and operational problems that the industry saw in 1967-1970. As such, he feels that the development of the Central Certificate System (CCS), wherein ownership is transferred from broker-to-broker by electronic bookkeeping entry, and where it holds one billion shares of stock with a value of over $30 billion, and where more than $50 billion of securities trading were transferred electronically in the first half of 1971, was an important step toward the eventual elimination of certificate handling.

Interestingly enough, Cunningham mentioned the following in his prepared statement: "The system has been completely audited by certified public accountants for three years now, attesting to its soundness." (P. 111, Hearings.)

On the other hand, the Practicing Law Institute of New York City, in conducting a course on "Criminal Law and Urban Problems," published a course handbook entitled "White Collar Crimes: Defense and Prosecution." In it is an excellent article entitled "The Impact of White Collar Crime," written by Herbert Edelhertz, former Chief of the Fraud Section, Criminal Division, Department of Justice. Edelhertz supervised nationwide prosecution in his several years at the Justice Department under a broad group of Federal statutes pertaining to the subject.

Mr. Edelhertz speaks of computers, with reference to "white collar crimes" in the following words:

"Technical developments increase our exposure to white-collar crime. A prime objective of computerization is the cutting of labor costs, which means substituting hardware and computer programs for expensive labor. Our experience has given us an extensive fund of knowledge (often imperfect) as to how we can control, audit, and monitor people, but we have only the most elementary knowledge of how to audit computers and those who have learned how to use them. Much thought is being given to methods of coping with computers from a management point of view, i.e., internal controls, but little to audit by outsiders such as regulatory or law enforcement agencies. The search for control procedures is complicated by the accelerating rate at which the computer art is developing, a rate which makes controls obsolete almost as quickly a they are developed. Existing control methodology is not adequate for internal control, or for investigation by investigating agencies, or for regulation by regulatory agencies." (White Collar Crimes; Pp. 20-21.)

Several government sources have told me, unofficially, that there is little, if any attention, paid to procedures involving security in relation to computers. Under the circumstances, there appears to be no reason why individuals could not manipulate or feed inaccurate but self-serving information into the computer data bank for their own subsequent enrichment or for some other sort of reward.

I recall the words of John F. Beardsley on this subject, too. Beardsley, Vice President of Hartford Fire Insurance Company, testified before our Subcommittee on June 25, 1971. The following discussion took place:

Mr. ADLERMAN. Mr. Beardsley, you discussed the computerization of stocks and bonds, the system of bookkeeping entry. You are, think, aware of the dangers of computerization, and the ability that a computer operation may have to fleece the company, is that right?

Mr. BEARDSLEY. Very definitely.

Mr. ADLERMAN. Would you care to express that?

Mr. BEARDSLEY. Computerization is only a progressive step in that it does what the chairman has just referred to. It has the effect of immobilizing the piece of paper. But after 30 years in this particular business, I am absolutely convinced that there will be ways found ultimately to steal via computer.

Senator RIBICOFF. In other words, man's ingenuity is more flexible than any machine. (Note: Beardsley agreed)

Mr. ADLERMAN. As a matter of fact, we will face in the future, probably, a new era of crime which will be computerized crime, is that correct?

Mr. BEARDSLEY. I believe so.

Mr. ADLERMAN. Suppose you have a knowledgeable person who knows how to enter a bookkeeping entry into the computer showing the payment maybe to a dummy corporation. Then he shows a false entry of payment. He may be able to milk a corporation or bank in very large amounts without the danger of detection for quite some time, is that right?

Mr. BEARDSLEY. Very definitely. I understand there are losses of that type in existence today. (P. 492, Hearings.)

It is very easy to be impressed by a presentation from any of the well-known computer corporations in this country. At the same time, we must remember that Michael Raymond said in regard to the elimination of a stock certificate by replacing it with an electronic bookkeeping entry, "It is a people problem, not a paper problem." This is particularly true when we stop, to reconsider that the well spoken of Central Certificate Service (CCS) had someone walk out with between $2.5 million to $3 million worth of securities last summer. Incidentally, that theft was not discovered until sources close to the Subcommittee made such information known to us first so that we could inform the New York Stock Exchange and the New York Police Department.

CONCLUSION

At the outset of the Investigations Subcommittee's hearings, when Attorney General John N. Mitchell appeared as the first witness on June 8, 1971, I was of the impression that the best way to get at the problem of the elimination of the stock certificate was to set up an interagency study group, composed of representatives from Federal, state and local governments to coordinate its activities with the securities industry and to insure that the industry itself took every possible step it could at the same time.

I am also mindful of the position that the representatives of the Midwest Stock Exchange took when they testified here, to the effect that they thought the securities industry should assume primary responsibility for resolving the problems that are within their capability to resolve, the one exception being their desire to have the Congress enact legislation which would provide for an exemption in regards to state or municipal stock transfer taxes.

I am favorably disposed to the provision of S. 2551 which establishes the National Commission on Uniform Securities Laws to study and recommend uniform state laws. The testimony of Mahlon M. Frankhauser who pointed out to our Subcommittee that it took almost five years to get the laws of the states amended so as to permit the Central Certificate Service (CCS) to become a reality. I also read the testimony of H. Russell Morrisson, Jr., President of Standard & Poors Corporation, before your Subcommittee when he said it took eight years for the Committee for Uniform Security Identification Procedures (CUSIP) of the American Banking Association to develop a uniform security code, which Morrisson considered the foundation for any change in the back office flow. I also recall the words of James M. Condon, Vice President of the Continental Insurance Company, as he appeared before our Subcommittee when he said he thought the elimination of stock certificates was an execellent idea, but then was asked whether he considered it to be workable. He replied:

"Well, I would have to answer this way, Senator. Of course, I know the plan. I have looked at some of the material that Mr. Zarb has passed around in the past. I know him, of course, from New York. We are more or less (in) the same line of business. But I have to say this: As I sat here listening yesterday, the thought across my mind was as a lawyer was the fact that it is not a good idea but rather consider the changes that would have to be taken into consideration. The banking laws of every State, the insurance laws of every State, decedent's estates, wills. Relate that to the uniform commercial code which was first adopted in Pennsylvania in 1954. It is only now getting to the point where 50 States recognize that uniform law.

"It seems to me that we have to take a more radical look at it from the standpoint that this fits into the general fabric of the economy of our country. It seems to me they are not trying to foist into the Federal legislature something that belongs to the States, but it seems to me that it is something that more belongs there than (in) the legislatures of 50 States." (Pp. 480-481, Hearings.)

I share Mr. Condon's views. I feel, that as the name of your Subcommittee implies, you are a study group and there is no need to form another to look at essentially the same problems. These matters are before you now and I agree with the several witnesses who think it would take too long to attempt to realize favorable enactments from the legislatures of the 50 States.

The distinguished Junior Senator from Delaware expressed it quite succinctly in his colloquy with Phillips Montross on October 1, 1971, before your Subcommittee when he said:

Senator Roth. . . . I realize you are not going to give us a deadline. But I, for one, would like to express an opinion that there is a definite time limit as to how long we should wait for Congress to act.

I think the problems that we suffered in 1968 make it imperative that there be prompt action and that, if not, there is going to be great compulsion for us to move on. (P. 279, Hearings.)

I think that the time to act is now.

I have tried to give you the viewpoints of the several experts who appeared before our Investigations Subcommittee-admittedly from the standpoint of the infiltration into the securities industry by elements of organized crime, and their associates, but also with regard to such factors as cost, operational inefficiencies, the dire need for qualified and honest personnel and positive security programs, so as to avoid any repeat of the "paper crunch" and its attendant problems of a few years ago.

I have also attempted to bring out a few of the pitfalls to be faced, such as the preference of the European financial community to work with stock certificates, and the need for caution in putting too much reliance on sophisticated electronic systems as the solution to the problems of the industry.

If there is one sentence that can best describe the certificate problem-as well as its solution-I think it would have to be in the form of a most significant comment that was made by SEC Chairman William J. Casey when he appeared before our Subcommittee.

In discussing the subject, Mr. Casey said: "If there were no certificates to steal, there would be no thefts of securities." I agree.

This concludes my prepared statement. I wish to thank you for your courtesy in allowing me to testify today. I hope that my presentation will be of some assistance to you as you continue in your important work.

Senator WILLIAMS. That is very valuable testimony for our committee, and I most appreciate it, Senator Percy. Turning to the specific bills before us, would S. 3297, eliminating the stock certificate in interdealer transactions, be a major step?

Senator PERCY. A major step, and I support it.

Senator WILLIAMS. Thank you very much.

Senator PERCY. Thank you, Mr. Chairman.

Senator WILLIAMS. Chairman William J. Casey of the Securities and Exchange Commission is our next witness. He is accompanied by his most able colleagues. The Commission is all present and accounted

for.

STATEMENT OF WILLIAM J. CASEY, CHAIRMAN, SECURITIES AND EXCHANGE COMMISSION; ACCOMPANIED BY COMMISSIONERS HUGH F. OWENS; JAMES J. NEEDHAM; A. SYDNEY HERLONG, JR.; AND PHILIP A. LOOMIS, JR.

Mr. CASEY. Mr. Chairman, we are all on hand.

Senator WILLIAMS. We are glad to have you, Mr. Chairman.

Mr. CASEY. Good morning, Senator. I am very pleased to be here. I have here with me, besides the other members of the Commission, Mr. Irving M. Pollack, director of the Division of Trading and Markets; and Mr. Lee A. Pickard, who is special counsel to the Chairman and who has been working on this matter.

78-429 0-72- -7

We are here to explain our views on three bills presently before the Senate affecting the clearance and the settlement of securities transactions.

One of the bills, S. 3412, was introduced at the Commission's request and has as its basis the recommendation for additional legislation which the Commission made to Congress in December of last year in its "Study of Unsafe and Unsound Practices of Brokers and Dealers." That study detailed the paperwork jam of 1967 to 1970 and the need for improvement and modernization of the system for clearing, settling, delivery and transfer of securities in order to reduce the possibility of loss to customers due to operational breakdown.

My written statement, which I would ask be put in the record, details how the Commission lacked the power then to deal with some of the severe difficulties caused by the failure of transfer agents to perform.

We believe that the authority we seek here is vital also to the proper development of a depository system. Despite the theoretical advantages of a depository, it is not clear at this point just what the effect of delivery by bookkeeping entries will be on the immobilization of the stock certificate, or on securities processing as a whole. Much depends on the extent to which the financial community avails itself of this service.

To make depositories into effective vehicles will require better communications between them and transfer agents, in order to insure more rapid transfers of ownership. Unresolved dividend differences, the inability of the depositories to reconcile their records with those of transfer agents and problems of theft have as their basis the present archaic and cumbersome relationship between depositories, brokers and transfer agents.

Yet, the Commission would be unable to address itself to this relationship in a meaningful manner under its present authority. My statement details the alternative direction in which depositories and transfer agents and the relation between them may evolve, and the need for a central authority to guide this development into a working system with other aspects of the securities transaction process over which the Commission now has authority.

Competing systems are also involved in the clearing area. Although discussions have begun and certain basic steps have been taken to interface these systems, a single, national system of clearance and settlement is not yet a reality. We believe that the public interest calls for authority not only to implement such a system on a timely basis, but to insure unification between such a system-a national clearing system-and transfer agents and depositories as well.

What is needed is a public entity having a national focus with the authority to insure that standardization and automation within the limits of technical feasibility can be accomplished as rapidly as possible, and to oversee the development of a nondiscriminatory nationwide approach to the processing of securities transactions which will serve the needs of industry participants and the investor.

The Commission now has jurisdiction over the broker-dealer community, investment companies, stock exchanges, securities associations, issuer companies (in certain respects), and subsidiaries of exchanges and security associations which perform clearance, settle

ment and depository tasks. This is a very large segment of the entities which will have to contribute to the creation of a working nationwide modernized securities transaction system.

These entities, together with transfer agents, are integral parts of the business of the security industry, and in view of the Commission's present oversight responsibility over those engaged in securities handling, the Commission would seem to be in the best position to determine standards and procedures for the entities sought to be regulated by our bill.

The Commission has gained significant expertise in this area. We have worked closely with the securities industry in formulating plans and policy for the system which exists today. Indeed, the Commission supplied the impetus for the NASD's National Clearing Corp. for over-the-counter securities. For these reasons we submit that the Commission is well qualified and is the logical choice to fashion the various standards and methods governing performance, operational compatibility among the various entities, financial safety, and reasonable nondiscriminatory access.

So, we are asking in this legislative request that our authority over clearing agents and depositories be maintained, that our authority over broker-dealers with regard to the processing of securities transactions be strengthened, and that our direct authority over transfer agents for minimum standards be established. The Commission, in seeking this authority, is not desirous of expanding its jurisdiction to conflict with that of Federal or State bank regulatory agencies and, in fact, these bank regulating agencies are given significant responsibility under the bill. Indeed, the bill we have asked that you introduce specifically states that nothing in it shall impair the authority of any State banking authority with regard to its exercise of regulatory or supervisory oversight over banks performing depository, clearing agent, or transfer agent functions.

Let me turn now to S. 2551, the bill entitled "The National Securities Corporation Act," and S. 3297, the bill entitled "The Securities Industry Paperwork Modernization Act."

S. 2551 would establish a federally sponsored national securities corporation which, in turn, would establish and operate a national securities depository and a national securities transfer system with its ultimate goal the elimination of the stock certificate. The Commission would be given general regulatory authority over this corporation. In addition, a commission on uniform securities laws would be established to determine the necessity of revising State laws to facilitate implementation of a national securities depository system.

The difference between this bill and the bill which the Commission recommends is that the latter is predicated on privately owned entities performing the clearance, settlement, and transfer functions. We take this view because we believe that a securities processing system already exists. While we have concluded that processing of securities transactions can best be accomplished by the private sector, we believe Senator Roth's bill to be an eminently desirable and sensible approach to this problem should the private sector be unable to accomplish the job.

Senator Roth's proposal for the creation of a commission on uniform securities laws is something the Commission would like to see come