Reference is made to the requests to this Department and to the Comptroller of the Currency from the Chairman of the Subcommittee on Securities for our views on S. 2058, which you recently introduced in the Senate. This bill is substantially similar to S. 3876, which you introduced in the 92nd Congress and which was passed by the Senate. The Department supports the aim of S. 2058 to prevent securities handling crises in the securities industry by establishing federal standards and regulations extending to clearing agencies and transfer agents. We also endorse the procedure for accomplishing this purpose in S. 2058 insofar as the bank regulatory agencies are utilized to participate in the administration of the provisions of the bill as they apply to banks. We believe that the supervisory agencies, including the Comptroller of the Currency, are particularly capable of administering the provisions of the bill and the Comptroller of the Currency is willing to do so with respect to national banks. Rule-making authority, however, is placed in the SEC with regard to minimum standards of performance and certain other operational aspects of clearing agents and transfer agents, banks as well as non-banks. While we note that the bank regulatory agencies have long experience in examining and supervising bank transfer agents, we recognize the value of uniformity and rule-making in the securities processing area, and we offer no objection to these provisions of the bill. The valuable input which bank regulatory expertise may contribute in this respect and which is recognized in section 17 B(h) should be underscored in the legislative record of the bill so that there will be no doubt that the SEC shall consult and cooperate with the appropriate agencies in formulating and promulgating these rules and regulations. We invite the specific attention of the Subcommittee to the following sentence of section 17 B(3)(b): "Each appropriate regulatory agency shall also file with the Commission such additional information as the Commission may, by rule, require to keep current the information in such notice and to carry out its responsibilities under this section.' 11 This requirement seems to be superfluous in view of the provisions of section 17 B(h) regarding cooperation among all agencies, and it would appear to give the SEC a measure of authority over the bank regulatory agencies. If this provision were enacted, the Commission could impose requirements upon the bank regulatory agencies which would be unduly burdensome and counterproductive. Certainly, if this proposed requirement is deemed to be necessary by the Subcommittee, the SEC should obtain the concurrence of the bank regulatory agencies before imposing any such rule. A recommendation was made by the Office of the Comptroller of the Currency last year in testimony before the Subcommittee on Commerce and Finance of the House Interstate and Foreign Commerce Committee that the securities processing bill be amended to provide that national banks could acquire and hold stock in clearing agencies and depositories. Present law does not permit a national bank to purchase or own a minority stock interest in any corporation with certain statutory exceptions. We continue to believe that it is highly desirable that national banks be permitted to own an interest in depositories or clearing agencies which they utilize. Accordingly, we suggest the following statutory language as part of S. 2058: Sec. Section 5136 of the Revised Statutes (12 U.S. C. 24) is hereby amended by adding a new subparagraph tenth as follows: "Tenth. Notwithstanding any other provisions in this section, to acquire or hold shares of stock Finally, we wish to register our strong disagreement with the suggestion of Commissioner John R. Evans of the SEC in his testi mony to the Subcommittee on July 11, 1973, that S. 2058 should be revised to provide the SEC with inspection power over clearing agencies, depositories and transfer agents, organized as banks to aid the SEC in determining appropriate performance standards and recordkeeping requirements. It is unreasonable to anticipate that either the banks involved or the appropriate agencies would withhold any information which might aid the SEC in setting performance standards and recordkeeping requirements. As banks are examined on a regular basis and are closely supervised by the regulatory agencies, additional inspection by the SEC would be redundant, burdensome and unfair. We respectfully urge that our comments on S. 2058 be taken into consideration in the Subcommittee deliberations on the bill. If we can be of further help in this matter, please do not hesitate to call upon us. In view of your request for the expedition of this report, it has not been possible to obtain the customary clearance by the Office of Management and Budget prior to its submission. Very truly yours, Sedward Schmitt's General Counsel Senator WILLIAMS. This morning we begin 2 days of hearings on the legislation. We appropriately open this morning with a statement from the Securities and Exchange Commission, from Commissioner John R. Evans. Mr. Evans, we are pleased to have you join us at the table. We look forward to your statement. STATEMENT OF JOHN R. EVANS, COMMISSIONER, SECURITIES AND EXCHANGE COMMISSION, ACCOMPANIED BY LEE A. PICKARD, DIRECTOR OF DIVISION OF MARKET REGULATION Mr. EVANS. Mr. Chairman, I am pleased to be here this morning to testify on S. 2058 which has the purpose of providing a regulatory framework for the development and regulation of an integrated national system for the clearance and settlement of securities transactions. With me is Lee Pickard who is the Director of our Division on Market Regulation. Lee is working in this securities-processing area daily and is very expert in this subject. I appreciate having him here with me, and I am sure as we get into the questioning period, he will be able to provide answers which will be beneficial to your consideration. I am happy to be working with you again in an effort to obtain reasonable securities processing legislation. I was greatly disappointed last year, as I know you were, after all of our work not being able to obtain enactment of legislation. How well I remember the efforts of the final week, almost frantic― I guess I could use that term-in trying to get an agreement between the parties and then when we felt we had that agreement having it fall through; and then as a last ditch effort trying to obtain barebones legislation which would at least provide the SEC some authority in the rulemaking area and having that also fall through on the last day of the session. So we are anxious to work with you again. And we hope securities processing legislation will be enacted this year. At the outset I would like to state that I am authorized to say the other members of the Commission concur in this statement. Legislation regarding the processing of securities transactions will, over the long term, have a significant impact on the brokerage industry and other members of the financial community as well as the investing public. We believe that the basic thrust of legislation should be to assure that a series of interdependent developments which are currently being implemented such as comprehensive securities depositories, systems for clearance and settlement of transactions and improved transfer facilities are effectively forged into a modernized, nationwide system for the safe and efficient handling of securities transactions on a timely basis and in a manner which best serves the financial community and the investing public. In this regard, we would like to see the private sector continue to play the major role in such developments with guidance from the Commission only to the extent necessary to assure an integrated, efficient system providing access on a reasonable, nondiscriminatory basis. Subject to the changes we recommend in this statement, we believe the Senate bill would provide a regulatory framework within which the above objectives could be accomplished. There are three basic functions which must be performed in a system for the settlement of securities transactions which will meet present and future needs. These are the function of a clearing agency, the function of a depository and the function of a transfer agent. Of these three functions, those of clearing agencies and transfer agents have existed for many years, while those of the depository are relatively new. A clearing agent settles transactions between member broker-dealers. Offsetting transactions between broker-dealers are netted out and the settlement and delivery is effected only as to the balance under the traditional balance order system. Under the more recent net-by-net system, balances may be carried forward and netted against future settling trades. Depositories hold large amounts of securities and effect delivery between participants solely by book entry and without the necessity for actual receipt and delivery of certificates by the participants. Transfer agents transfer certificates from the name of the seller into the name of the buyer. At present, these functions are uncoordinated. Each of the major exchanges and the NASD has a separate clearing agency for transactions between their members. In addition, each corporate issues either acts as its own transfer agent or retains a separate organization which may or may not be a bank, to perform that function. Depositories are of recent origin, and there has been a tendency for separate depository systems to be developed, but their interface has been slow and difficult. We believe that coordination of these presently uncoordinated activities which is a principal objective of S. 2058 is essential. Furthermore, as the bill recognizes, at least in part, the separate functions of clearing agencies, depositories and transfer agents are susceptible as being combined in various ways, and some combination would appear desirable. Thus, the same agency might perform both clearing agency and depository functions; indeed, this seems a logical development. In addition, it would be possible for a transfer agent to also perform the function of a depository. At present, depositories have developed separately from transfer agents both because of the large number of transfer agents which serve individual issuers of securities and also because depositories were assigned different functions at their inception. The development of a transfer agent depository could, however, provide certain advantages since it would make depository services available to individual investors and smaller institutions whose participation in the securities markets may not be sufficiently active to justify their assuming the obligations of a participant in a pure depository. We believe, therefore, that the bill should be modified to permit the combination of depository services and transfer agent services in one institution if the Commission determines that this is feasible and desirable. We would be prepared to assist the subcommittee in framing amendments which would keep this option open. As I have mentioned, however, the important thing is to develop a nationwide, coordinated system for performing the functions of clearing agents, depositories and transfer agents and to provide adequate |