Additional statements and documents from: Pacific Coast Stock Exchange_ Pacific Clearing Corp. Securities and Exchange Commission__ National Coordinating Group for Comprehensive Securities Depositories_ Bank Administration Institute. National Clearing Corp- The Institutional Investor.. Federal Reserve Bank of Richmond, by Albert D. Tinkelenberg 55, 504 56 174 204 243 251 294 342 348, 518 352 447 451 467 471 482 483 500 515 519 523 QUALITY CONTROL MARK REGULATION OF CLEARING AGENCIES AND TRANSFER AGENTS WEDNESDAY, JULY 11, 1973 U.S. SENATE, COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS, SUBCOMMITTEE ON SECURITIES, Washington, D.C. The subcommittee met at 9:40 a.m., pursuant to call, in room 5302, Dirksen Senate Office Building, Senator Harrison A. Williams, Jr., chairman of the subcommittee, presiding. Senator WILLIAMS. I think we have to rap the gavel. This is the Subcommittee on Securities. We begin our hearings on a bill concerning the regulation of the clearance and settlement of securities transactions. This bill is similar to S. 3876 which the Senate unanimously passed last year and upon which the House acted, but in a slightly different form. Unfortunately, the Congress adjourned before there was an opportunity for a conference to resolve the differences between the two bills. This year, we intend to act promptly on S. 2058 so that there will be ample opportunity for a House-Senate conference if that is necessary. This bill has two objectives. The first is to prevent future paperwork crises in the securities industry. The second is to create a central governmental decisionmaking authority capable of coordinating the diverse and often antithetical approaches to certificate processing which are now emerging. Let me say a few words about each of these objectives. The paperwork crisis during the late 1960's resulted from the securities industry's inability to process the tremendous volume of trading. All too often, deliveries to customers were late and stock certificates were lost, all in this rising tide of paper. Firms lost control of their records, and over 100 broker-dealers were forced into liquidation, largely as a result of faulty recordkeeping and the backlog of uncompleted transactions. These liquidations caused financial hardships to many investors who left their securities with brokerage houses for safekeeping. A noted economic historian recently characterized this crisis as perhaps the single most dramatic technical failure of the free-enterprise system on record anywhere. The Congress responded in part to this situation by enacting the Securities Investors Protection Act of 1970. But we in the Congress were not satisfied with merely insuring the public against brokerage house failures. We began to exercise a closer and more continuing (1) scrutiny of the securities industry. The legislation before us today is a direct result of that scrutiny. Turning briefly to the bill's second objective, a leading financial reporter has written: A labyrinthine and arcane, but intense and often chaotic battle has quietly developed among the Big Board, the regional exchanges, the NASD, the New York banks, the regional banks and the major brokerage houses over just who is going to control the machines that are being set up to take care of the paper [involved in securities transactions]. This bill is intended to bring an end to that battle. I believe competition in the area of securities processing is healthy, and this legislation does not decree its premature demise. However, the loser in the industry's current round of infighting is not only the investor who must put up with the confusion and delay inherent in the proliferation of clearing systems. The loser is also the individual securities firm which is forced to interface with from one to seven clearing systems and not less than four different securities depositories. What we have in the securities-processing area is not healthy and strengthening competition, but institutional empire building. The industry is in desperate need of a single governmental agency with the authority and the responsibility to bring order out of the existing jurisdictional chaos. Someone must have the authority to knock heads together and move the whole industry toward a rational, nationwide clearing system. And that someone should have an appreciation of the major costs incurred by securities firms in the settlement of trans actions. This bill which I have introduced with Senators Tower, Bennett, Brooke, and Stevenson, will give the SEC precisely that authority over the policy development and operations of everyone involved in the securities-handling process. It also provides a major role for the bank regulatory agencies in the inspection of the bank components and in the enforcement of the rules with respect to these banks. per The bill before us today reflects the considered judgment of all sons concerned and involved with the processing of securities transactions. I believe that it is important for us to act promptly upon this bill so that investors are assured that their funds and securities are efficiently and economically processed. [Copy of S. 2058 and letters from regulating agencies follows:] 93D CONGRESS 1ST SESSION S. 2058 IN THE SENATE OF THE UNITED STATES JUNE 22 (legislative day, JUNE 18), 1973 Mr. WILLIAMS (for himself, Mr. BENNETT, Mr. BROOKE, Mr. STEVENSON, and Mr. TowER) introduced the following bill, which was read twice and referred to the Committee on Banking, Housing and Urban Affairs A BILL To amend the Securities Exchange Act of 1934 to provide for the regulation of clearing agencies and transfer agents, and for other purposes. 1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 3 SECTION 1. Section 2 of the Securities Exchange Act of 4 1934 (15 U.S.C. 78b) is amended by striking the word 5 “and” immediately before the phrase "to impose require6 ments necessary to make such regulation and control reason7 ably complete and effective," and by adding the following 8 immediately after that phrase: "and to provide for the 9 development of an integrated national system for the prompt 2 1 and accurate processing and settlement of securities 2 transactions,". 3 4 5 6 7 8 9 10 11 12 13 14 16 17 SEC. 2. Section 15A (k) (2) of the Securities Exchange Act of 1934 (15 U.S.C. 780-3 (k) (2)) is amended by inserting after clause (D) the following: "(E) the time and method of making settlements, payments, and deliveries and of opening, maintaining, and closing accounts." SEC. 3. Section 3 (a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c (a)) is amended by adding at the end thereof the following new paragraphs: "(22) The term 'clearing agency' means any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who 15 provides facilities (A) for comparison of data respecting the terms of settlement of securities transactions, (B) to reduce the number of settlements of securities transactions, or (C) for the allocation of securities settlement responsibilities. Such term also means any person who acts as a custodian of securities in connection with a system which permits securities 18 19 20 21 so held to be transferred, loaned, or pledged without physical 22 delivery of securities certificates, or which otherwise permits or facilitates the settlement of securities transactions or the 24 hypothecation or lending of securities without physical deliv 23 25 ery of securities certificates. The term 'clearing agency' does |