should be clarified.

Another problem we find in S. 2058 is the definition of "clearing agency". The exemption of lending, fiduciary, correspondent or safekeeping functions commonly performed by banks, brokers and other financial institutions which was included in S. 3876 has been changed by the addition of the words "on the date of enactment of this paragraph". We suggest this new language be deleted as it may unduly restrict the normal growth of services performed by banks and other financial institutions.

Also it should be clarified that transfer agent depositories are not included in the definition of "clearing agency". As indicated earlier considerable time, money, and effort have been devoted by at least one bank to the development of this concept, and it now serves one corporation in this capacity. This concept is close to the certificateless concept in that share issuance and transfer are by bookkeeping entry only even in the case of individual shareholders.

Such depository func

tion is closely related to the transfer agent function, and such depositories should be regulated the same as transfer agents. This would not cause any coordination problems because the SEC would have full authority to require operational compatibil

ity.

A provision should be added to the bill which would authorize national banking associations, with the approval of the Comptroller, to invest a limited amount in the stock of one or more depositories. National banks would be encouraged to place trust assets in depositories if they could own shares in the depository and participate in its management.

Finally, it should be made clear that the SEC's enforcement authority under

Section 21 of the 1934 Exchange Act is not applicable to depositories, or that this authority is only residuary and not to be exercised unless a banking agency fails to do its job with regard to the depository/clearing agency provisions of the bill.

The Association fully supports Section 8 of S. 2058 which relates to state

taxes.

In conclusion, if Congress decides legislation to regulate securities processing is necessary, the ABA supports S. 2058 with the few revisions and clarifications discussed.

Mr. Chairman, I want to thank the Subcommittee for this opportunity to appear and discuss the position of The American Bankers Association.

I would like to offer

the Association's services to the Subcommittee to help in any way we can.

Senator WILLIAMS. You have been very helpful.

Now we have the National Association of Securities Dealers, the president, Mr. Gordon Macklin, and well-supported.

STATEMENT OF GORDON S. MACKLIN, PRESIDENT, NATIONAL ASSOCIATION OF SECURITIES DEALERS; ACCOMPANIED BY DAVID H. MORGAN, PRESIDENT, NATIONAL CLEARING CORP.; AND LLOYD J. DERRICKSON, GENERAL COUNSEL FOR NATIONAL ASSOCIATION OF SECURITIES DEALERS AND NATIONAL CLEARING CORP.

Mr. MACKLIN. It is a pleasure to be here this morning and as you say, I am well-supported and have David Morgan, the president of the National Clearing Corp., on my right, and Lloyd Derrickson, general counsel of both the National Asociation of Securities Dealers and National Clearing Corp., on my left.

In view of the expertise of your committee relating to securities and because we believe progress of NCC in establishing a nationwide clearing system on OTC transactions is generally known, I will not read our prepared statement, preferring instead to answer such questions as the committee may wish to ask. We would be pleased to submit details or further explanations of our activities for the record or otherwise should the committee so desire or to answer in writing as to any matter you desire.

I would like to take this opportunity to commend the committee and its staff not only for the very excellent study it has recently completed but also for its foresight in undertaking these hearings to deal with the implementation of a comprehensive basis for regulation of securities processing. We stand ready to assist in this endeavor in any way you may desire.

Finally, and parenthetically, may I add with your permission, we would appreciate the opportunity to submit in writing some brief technical comments which may be helpful to the committee relating to the procedures for changes in rules of clearing agencies and as to compliance with the bill's requirements by NCC.

Senator WILLIAMS. Is NCC concerned exclusively with clearing OTC transactions?

Mr. MACKLIN. That is our original mandate and what we set out to do. Of late, we have been approached by the Boston Stock Exchange to explore an arrangement whereby we would clear all transactions for their members and there are extensive discussions going on with them at this time.

In addition, we have had some extensive discussions with the Pacific Stock Exchange and are preparing what we hope will be an arrangement with them to clear over-the-counter transactions on the West Coast and as part of that they have raised the point they would like to see one system to clear both listed and over-the-counter transactions. So it is conceivable on the west coast we will be exploring clearing both types of transactions with the Pacific Exchange. Fundamentally, our mandate was to clear over-the-counter transactions. We have gotten into exploring other transactions at the invitations of these two exchanges.

Senator WILLIAMS. So are your plans for the future to broaden this?

Mr. MACKLIN. Well, our plan for the future is to fullfill our original mandate to see that there is a clearing facility for all over-thecounter transactions and then to interface that clearing facility with the depository network so that those transactions and those members can have use of all national facilities.

Senator WILLIAMS. What is the jurisdictional relationship between NCC and the clearing depository operations set up by the exchanges such as the Depository Trust Co. in New York, Midwest Securities Trust Co. in Chicago and Pacific Securities Depository in San Francisco?

Mr. MACKLIN. That is a question I would like to defer to Mr. Derrickson because of his legal expertise.

Mr. DERRICKSON. As I see it, Senator, it goes to the prior question and that is clearing by exchanges of listed stocks and by NCC of overthe-counter transactions. The jurisdiction in a legal sense is very clear in the sense that transactions on the floor of the exchange, listed transactions, are cleared by their clearing corporations. They have subsidiary rules or additional rules relating to their depositories which as we have heard today, and as we know, are becoming the trust companies or limited purpose trust companies.

So I think Mr. Macklin's earlier remarks about interfacing with the depositories answers that question. Now, perhaps you have something different in mind as to jurisdiction and if it is in the legal sense, I assume it is whether or not the Commission has jurisdiction over these things in ways that the bill would remedy. If that is the question, then I would have to answer that it does, in my opinion.

Senator WILLIAMS. I think that will be sufficient to cover the subject. On this question of the interfacing, what precisely is meant by interface in the context of differing clearing and depository operations? Mr. MORGAN. Mr. Chairman, in the context of securities processing procedures and systems, I guess the easiest way to explain it is to say it is a tying together of the two systems. They must be complimentary to each other. In other words, each system serving the other.

Now, in terms of the clearing element of interface, clearing essentially serves as the front end or input of trade information and trades that have been cleared and settled, and in the case of the depository it would be the depository acting in the custodianship and related bookkeeping or recordkeeping type of capability which is designed to immobilize the certificate movement to the greatest extent practicable.

Now, in addition to that, interface also implies, I believe, that the systems should be supplementary to each other in the sense that the sum of these two systems forms the trade completion process. There is no intent nor should it be inferred that an interface is anything more than having the two systems tie together to provide a more complete service than either one of them could provide on a singular basis.

Senator WILLIAMS. I get the impression that there is movement toward this interfacing and I just wondered how this is progressing and how close are we to this fully supplementary situation and capability.

Mr. MORGAN. The staffs of the Depository Trust Co. and NCC have had a series of meetings and systems discussions over the past several months so that we can define completely what would be required in order to perfect the so-called interface. It will require, for example,

to NCC, an extension of its present system and I am sure it would require some modifications on the part of the Depository Trust Co. in order to pick up what I have referred to as the front end or input information from clearing.

We have worked up a pilot program involving one broker on a very limited and somewhat manual scale which we expect to become operational later this month so that we can better understand how each of our operations work and how we can then improve that to perfect a highly automated type of interface which we plan to do Îater this year.

Senator WILLIAMS. You believe this bill will speed the development of a true national clearing and depository system?

Mr. MACKLIN. Yes, we do.

Senator WILLIAMS. Ideally, what would be the first move after it is signed into law? Would this put you in a position with those with whom you must ultimately be working in the clearing and depository functions would you take the initiative or should the SEC take the initiative?

Mr. MACKLIN. We have already taken the initiative in most of the areas where we are involved. I think it would put in front of all of us— all entities concerned-in a very clear manner that there is indeed strong oversight authority and any areas of disagreement have a forum where they will be resolved rather than just prolonged and delayed.

So I think for the most part we would continue to proceed with our programs, but I believe they would move more effectively with a stronger and more coordinated SEC oversight.

Senator WILLIAMS. How much time will be involved in reaching this happy and rational state of clearing?

Mr. MACKLIN. In all fairness to the present atmosphere, a lot of progress has indeed been made. You have seen it through the statements filed and you can see it from the progress that entities like NCC and the Depository Trust Co. and the regional depositories have made. So there is good motion on many fronts.

I think we are much closer to a coordinated national clearing system than a first look might indicate. I would guess within a year or two you would have this problem resolved. I would also say that is an unscientific guess.

[Complete statement of Mr. Macklin follows:]

STATEMENT OF GORDON S. MACKLIN, CHAIRMAN, BOARD OF DIRECTORS, NATIONAL CLEARING CORP.

Chairman Williams and members of the Subcommittee. I am pleased to be here to present our views on S. 2058. Accompanying me are David H. Morgan, President of the National Clearing Corporation (NCC), a wholly owned subsidiary of the National Association of Securities Dealers, Inc., and by Lloyd J. Derrickson, Senior Vice President and General Counsel of the NASD, who is also Vice President-Legal of NCC.

In May 1972, in testimony before this Committee relating to S. 3297 and S. 3412, we supported the establishment of a statutory framework for regulation of the securities processing cycle. In our opinion legislation then proposed, as well as S. 2058, much of which is based upon a very excellent and thorough study recently made by the Subcommittee, is necessary and its enactment would be a meaningful advancement in the establishment of a uniform nationwide pattern for regulation of securities processing, a problem which has plagued the industry's operations since 1968. Despite the fact that significant reforms have been