"Nothing in this Section shall impair the examination powers of the Commission with regard to persons for which it is the appropriate regulatory agency or the authority of any state banking authority or other state or Federal regulatory authority having jurisdiction over a person registered as a clearing agency from making or enforcing rules governing such person which are not inconsistent with this Section or any rules or regulations promulgated hereunder."

Similar language should be inserted for transfer agents in proposed Section 17B at the end of paragraph (k), on page 29 of the bill.

SECTION 6

Proposed Subsection 17B (a) (3) would make clear that the provisions of Section 17B shall apply only to securities which are pursuant to Section 12 of the Exchange Act, or which would be required to be so registered except for the exemption provided in Subsection (g) (2) (B) or (g)(2) (G) of Section 12 and persons performing the function of transfer agents with respect to securities. Proposed Section 17B woud not apply to variable annuity contracts issued by insurance companies. The last sentence of proposed Subsection 17B (a)(3) should be revised to make clear that service agents who may perform transfer agent function in connection with variable annuity contracts would be subject to the requirements of Section 17B.

Proposed Subsection 17B (i) regarding compliance with the requirements of proposed Section 17B by the appropriate regulatory agencies other than the Commission, indicates that a non-bank subsidiary of a bank holding company shall be considered a bank. In his statement of July 11, 1973, Commissioner John R. Evans recommended that the Commission be the appropriate regulatory agency for all non-bank subsidiaries of bank holding companies which are either depositories, clearing agents or transfer agents. We again strongly endorse this recommendation.

Mr. Stetson B. Harman, senior vice president and executive trust officer, First National Bank of Oregon, and president, trust division, American Bankers Association.

The bankers are in town, are they not?

STATEMENT OF STETSON B. HARMAN, SENIOR VICE PRESIDENT AND EXECUTIVE TRUST OFFICER, FIRST NATIONAL BANK OF OREGON, AND PRESIDENT, TRUST DIVISION, THE AMERICAN BANKERS ASSOCIATION, ACCOMPANIED BY EUGENE M. TANGNEY, SENIOR VICE PRESIDENT OF THE FIRST NATIONAL BANK OF BOSTON; FRED M. SHELL, VICE PRESIDENT OF THE FIRST NATIONAL BANK OF ATLANTA; AND ROBERT L. BEVAN, ASSISTANT FEDERAL LEGISLATIVE COUNSEL, THE AMERICAN BANKERS ASSOCIATION

Mr. HARMAN. Yes; they are.

Senator WILLIAMS. Senator Packwood certainly wanted to be here, Mr. Harman, but necessarily had to be at the executive session of the Finance Committee. So, therefore, he is not here to welcome you, although he certainly wanted to. He wanted to commend you for your capable and fine work. And I pass on Senator Packwood's observation. Mr. HARMAN. Thank you.

Mr. Chairman, my name is Stetson B. Harman. I am senior vice president and executive trust officer of the First National Bank of Oregon, Portland, and president of the Trust Division of The American Bankers Association.

This morning. I am accompanied by Mr. Eugene M. Tangney, senior vice president of the First National Bank of Boston who is chairman

of the Corporate Trust Activities Committee of the American Bankers Association's Trust Division on my left, Mr. Fred Shell on my right, vice president of the First National Bank of Atlanta, and Mr. Robert L. Bevan, assistant Federal legislative counsel of the ABA.

We appreciate this opportunity to appear before your subcommittee to discuss S. 2058. And may I respectfully request that while these comments are a summary of our written statement, we would like to have the entire statement included in the record.

Senator WILLIAMS. That will be done.

[The complete statement of Mr. Harman may be found at p. 183]. Mr. HARMAN. Before discussing the bill's provisions, I would like to outline the basic policy position of the ABA on securities processing. The association believes the ultimate objective in modernizing securities processing should be the elimination of the stock certificate to the maximum extent possible. Because there are many major obstacles that must be overcome to achieve this goal, the ABA supports as an immediate objective the development of a regional securities depository system to immobilize as many stock certificates as possible. This depository system should include depositories in any geographic area where there is economic and operational justification.

The internal operating procedures of these depositories do not need to be standardized, but it is essential that standards be developed and implemented to permit efficient and economical interchange of information between depositories and between depositories and banks, brokers, and transfer agents.

Governmental regulation of the system should be accomplished by review of securities processing operations for adequate control, auditing, and conformity to standards. Regulatory authorities should not stipulate nor unreasonably restrict an organization's internal systems, procedures, and staffing, nor should they limit an organization in exercising its management responsibilities.

During the past year since the association appeared before the subcommittee on similar legislation, there has been substantial progress by the three securities depositories.

In our prepared statement, we set out some specific data regarding the New York depository, and since that preparation, we have obtained some specifics on the progress of the Pacific and Midwest depositories. The banking community on the west coast has made financial commitments of $2.3 million to support further development of the Pacific depository and has expressed their intent to provide an additional $1.4 million for its development.

The banks have also committed themselves to participating in the depository.

This depository received trust company approval late last year, but has not yet activated its charter. The depository has approximately 9,000 issues on deposit with a market value of $1.2 billion.

In the Midwest, the banks and exchange have approved a letter of agreement which in addition to other matters commits the banks to $1 million during the first year for development of the depository. The depository has also been chartered as a trust company and has applied for membership in the Federal Reserve System.

This progress reduces significantly any need for new Federal legislation to regulate depositories or transfer agents, at least those which are banks and subject to bank supervisory authorities.

Should Congress, however, decide legislation is necessary recent developments also reveal the shape that the legislation should take. The private sector has proven itself capable of developing solutions; and the problem, if any, is one of implementing standards for efficient and economical interchange of information between the various elements involved in securities processing.

Turning now to S. 2058, we believe this bill with a very few revisions and clarifications would provide a workable responsible regulatory scheme for securities processing. While substantially the same as S. 3876 passed by the Senate last year, there are some important changes, and we believe most of them improve the measure.

Section 6 of the bill relating to transfer agents is of primary concern to banking. It would require transfer agents to comply with rules and regulations prescribed by the SEC:

As necessary or appropriate in the public interest, for the protection of investors or to effectuate the purpose of this section with regard to standards for the performance of transfer functions, measures and procedures for safe handling and custody of securities and operational compatibility of transfer agents with other persons involved in the securities handling process.

The ABA recognizes the need for one agency to establish standards for compatibility of transfer facilities with other facilities in the securities handling process and that this agency should be the SEC. As to standards of performance, we recognize they could have a direct impact on securities processing and thus should be subject to SEC rulemaking authority.

However, standards of performance also relate directly to internal operations and this makes it imperative that the 15-day provision of subsection (k) remain in the bill as finally enacted. The SEC should give particular consideration to the views of the banking agencies which would be provided under subsection (k) regarding the impact of proposed regulations on transfer agent banks.

In the area of safe handling and custody of securities, we can see no reason for giving the SEC rulemaking authority over banks that serve as transfer agents. One of the principal services of banks over the year has been the safeguarding of valuables of all kinds, primarily cash and securities. This is an area in which the bank supervisory agencies have particular experience and expertise. In 1968, the Congress specifically imposed responsibility in this area on the banking agencies in the Bank Protection Act.

We do not believe the SEC could add anything of value to the current regulation of banks in this area. But it is quite likely that despite the provisions for coordination, banks would find themselves subject to conflicting regulations if the SEC is given authority in this area. Consequently, the association urges the subcommittee to delete the authority for the SEC to prescribe rules and regulations for transfer agent banks with regard to measures and procedures for safe handling and custody of securities.

New language in subsection (j) also raises a question as to its meaning. The last sentence now reads,

Except to the extent that enforcement of the requirements imposed under this section is specifically committed to another appropriate regulatory agency, the Commission shall have primary responsibility to enforce such requirements.

The word primary, was not found in S. 3876. In the previous bill, this provision clarified the enforcement roles of the various agencies,

placing transfer agent banks under the jurisdiction of the banking agencies and other transfer agents under the SEC. The word primary, however, seems to indicate an enforcement role for the SEC over transfer agent banks, including a primary enforcement role in certain instances.

We oppose the SEC having any enforcement authority over transfer agent banks. The authority should be granted completely to the banking agencies. They would be better able through their periodic examinations and enforcement powers to carry out the new law and the rules and regulations prescribed thereunder.

The Comptroller of the Currency testified last year that considering the nature of bank regulation, registration of transfer agent banks would serve no supervisory purpose. We urge the subcommittee to consider this point. In this day and age, paperwork is already threatening the vitality of our economy, and it would seem unwise to add more if it serves no public purpose.

The regulation of securities depositories is also a matter of major concern to banking because if these depositories are to accomplish their purpose of immobilizing securities, banks must place on deposit with them securities held in a fiduciary or other capacity. Banks are held to the highest standard of care in the protection of trust assets, and they cannot be expected to place such assets in depositories unless they have the utmost confidence in their operations and management. S. 2058 recognizes this need by splitting responsibility for regulation of depositories between the banking agencies, actually the Fed and the SEC.

As indicated earlier, the progress which has been achieved by the three depositories and their membership or planned membership in the Federal Reserve System reduces substantially the need for legislation. However, if Congress decides to act, we support the depository/ clearing agency provisions of S. 2058 with a few revisions.

In addition to considering a potential participant's operational capacity and to requiring a bond or deposit, a securities depository should be allowed to consider the potential participant's character and real financial responsibility. The rules of the depository establishing standards in these areas would, of course, need to be reasonable and consistent with the purposes of the act and with the public interest. Such rules would be subject to SEC review on registration of the depository or on subsequent adoption. Also, denial of access on either of these grounds would be subject to the procedural safeguards of the bill and to review by the appropriate regulatory agency.

Next, the shareholders of a depository should have complete authority over adoption of rules, election of directors and officers, and all other phases of the administration of the depository's affairs.

A depository is not a public institution in the sense of the NASD or the stock exchanges which more or less stand in the place of Government in regulating their membership. Also, a depository does not directly serve the investing public. Consequently, there does not appear to be any sound reason for departing from the traditional principles of corporate management. Shareholders should control depositories.

Third, the bill, unlike S. 3876, would give the Commission rulemaking authority over depositories with regard to measures and personnel standards for safehandling and custody of securities and funds.

"Nothing in this Section shall impair the examination powers of the Commission with regard to persons for which it is the appropriate regulatory agency or the authority of any state banking authority or other state or Federal regulatory authority having jurisdiction over a person registered as a clearing agency from making or enforcing rules governing such person which are not inconsistent with this Section or any rules or regulations promulgated hereunder."

Similar language should be inserted for transfer agents in proposed Section 17B at the end of paragraph (k), on page 29 of the bill.

SECTION 6

Proposed Subsection 17B (a) (3) would make clear that the provisions of Section 17B shall apply only to securities which are pursuant to Section 12 of the Exchange Act, or which would be required to be so registered except for the exemption provided in Subsection (g) (2) (B) or (g) (2) (G) of Section 12 and persons performing the function of transfer agents with respect to securities. Proposed Section 17B woud not apply to variable annuity contracts issued by insurance companies. The last sentence of proposed Subsection 17B (a) (3) should be revised to make clear that service agents who may perform transfer agent function in connection with variable annuity contracts would be subject to the requirements of Section 17B.

Proposed Subsection 17B (i) regarding compliance with the requirements of proposed Section 17B by the appropriate regulatory agencies other than the Commission, indicates that a non-bank subsidiary of a bank holding company shall be considered a bank. In his statement of July 11, 1973, Commissioner John R. Evans recommended that the Commission be the appropriate regulatory agency for all non-bank subsidiaries of bank holding companies which are either depositories, clearing agents or transfer agents. We again strongly endorse this recommendation.

Mr. Stetson B. Harman, senior vice president and executive trust officer, First National Bank of Oregon, and president, trust division, American Bankers Association.

The bankers are in town, are they not?

STATEMENT OF STETSON B. HARMAN, SENIOR VICE PRESIDENT AND EXECUTIVE TRUST OFFICER, FIRST NATIONAL BANK OF OREGON, AND PRESIDENT, TRUST DIVISION, THE AMERICAN BANKERS ASSOCIATION, ACCOMPANIED BY EUGENE M. TANGNEY, SENIOR VICE PRESIDENT OF THE FIRST NATIONAL BANK OF BOSTON; FRED M. SHELL, VICE PRESIDENT OF THE FIRST NATIONAL BANK OF ATLANTA; AND ROBERT L. BEVAN, ASSISTANT FEDERAL LEGISLATIVE COUNSEL, THE AMERICAN BANKERS ASSOCIATION

Mr. HARMAN. Yes; they are.

Senator WILLIAMS. Senator Packwood certainly wanted to be here, Mr. Harman, but necessarily had to be at the executive session of the Finance Committee. So, therefore, he is not here to welcome you, although he certainly wanted to. He wanted to commend you for your capable and fine work. And I pass on Senator Packwood's observation. Mr. HARMAN. Thank you.

Mr. Chairman, my name is Stetson B. Harman. I am senior vice president and executive trust officer of the First National Bank of Oregon, Portland, and president of the Trust Division of The American Bankers Association.

This morning. I am accompanied by Mr. Eugene M. Tangney, senior vice president of the First National Bank of Boston who is chairman