Representative John E. Moss Depositories as custodians for one another July 5, 1973 Under the Uniform Commercial Code a "clearing corporation" must, as a practical matter, keep possession of securities held by it or place them in a custodian bank. Interface depends on the capacity of depositories to act as custodians for each other. This interrelationship among depositories can be accomplished when depositories are chartered as banks (i.e., trust companies incorporated under banking law). This has now been done, as concerns the Midwest, West Coast, and New York depositories. Regulatory coordination and supervision Although each of the three depositories will be subject to examination and supervision by their respective state banking departments, what might be called another aspect of depository interface is coordinated regulation. This has been accomplished by the taking of two steps. The first is the submission of each depository's articles of incorporation, by-laws, and rules to the SEC for review and approval. This has been done by the Midwest and New York depositories, and is in process for the one on the West Coast. The other step is to obtain coordinated bank supervision and examination. This is to be accomplished by having each depository become a member of the Federal Reserve System. The New York depository has already received such membership and the Midwest is in the process of applying. Funds settlement An important question of depository interface is the manner in which the cash side of securities transactions is settled both among depositories and between a given depository and its depositors. A working committee of the National Coordinating Group has studied this matter in depth and has made recommendations which have been adopted by the National Coordinating Group. A copy of the Working Committee report is enclosed. (Enclosure B). Task forces from the depositories are working on a number of technical and procedural matters. Interdepository custodian agreements are being drafted. The use of facsimile and other fast transmission methods is being worked out. Enclosure C, a report on "Applicability of Electrical Communications Within a Depository" is being used to advantage. Other operating-level questions as to detail are surfacing and, one-by-one, being disposed of. Representative John E. Moss July 5, 1973 Attention is also being given to some longer-range opportunities for efficiency and effectiveness. Development of a standard financial industry numbering system (FINS) has been approved and steps authorized to implement. This standard is not urgently needed now, but will definitely be needed later to facilitate use of modern communications technology. In general, it is believed that depositories can--as they are the hub-act as leaders, stimulators, and catalysts among the entire financial community in bringing modern technology to a major part of the trade completion process. Even for transactions in securities which cannot be made eligible for depositories--but every effort should be made to expand the eligible list--the related systems effect should be substantial. (2) 'Whether banks are giving financial support to the development "banks are giving financial The answer to this question is "yes" (a) Six Chicago banks have committed $1,000,000 in the next 12 months for the further development of the Midwest Securities Trust Company. This commitment is reflected in paragraph 3 (page 8) of a Memorandum of Understanding executed by the six banks and the Midwest Stock Exchange, a copy of which is enclosed. (Enclosure D). (b) The West Coast banks have committed, for Phase I, $2.26 million for the development of the Pacific Securities Depository. The total projected capital investment for the whole project is $7.4 million. (c) The 12 New York Clearing House banks have contributed to BASIC from its formal inception on March 11, 1970, the amount of $650,000 or 50 per cent of the $1,300,000 expenses incurred by BASIC to date. The remaining 50 per cent has been paid by the American Stock Exchange, National Association of Securities Dealers, and the New York Stock Exchange, each of whom assume 1/3 of the aforementioned 50 per cent. The Memorandum of Understanding executed in September, 1971, on a Comprehensive Securities Depository System between American Stock Exchange and the New York Clearing House banks is reproduced on pages 1922-28 of your 1971 hearings. For ease of reference, a copy is enclosed herewith. (Enclosure E). (d) In addition to these incurred and contemplated out-of-pocket expenditures the Midwest, West Coast, and New York banks have contributed extensively the time and experience of many of their officers and staff to the actual development and usage of the depositories in their respective areas and to the development of a Comprehensive Securities Depository System. Some of these contributions are evidenced, Representative John E. Moss July 5, 1973 among other things, by their work pertaining to depository interface, insurance questions, the CHIPS, CUSIP, and FINS Systems, Standardization of Funds Settlement for Securities Transactions, development of collateral loan programs for brokers and banks at depositories and by banks depositing securities with depositories, as participants, on a trial basis pending clarification of regulatory and other questions. The American Bankers Association has expended time, effort, and advice in furthering the necessary amendments to the UCC and by conducting and participating in seminars as to depository procedures and benefits. It is clear that banks are not only "giving financial support to the development of depositories" but are incurring further and indirect costs by contributing people, time, and experience in large measure. These commitments reflect the view that through participation in the development of depositories the banks, all of whom have fiduciary responsibilities, can assure that depositories will have the appropriate character, operational, financial, legal capabilities, and regulatory atmosphere. (3) 'What, if any, new problems have arisen in the development of the interregional concept. More particularly, what is the probable effect of requiring new and higher rates of return on capital or increased interdepository charges?" No unforeseen problems of substance have been encountered. Some foreseen procedural problems remain to be resolved--and will be--such as the handling of dividends, proxies, withdrawal of nominee certificates, etc., where the internal procedures for the handling of such matters now differ among depository operations. As to "requiring new and higher rates of return on capital or increased interdepository charges", it is contemplated that beyond a nominal rate of return on shareholders' investment, depositories' charges to users would be scaled to cover depository costs. Our committee appreciates your interest in this effort and the opportunity to tell you of our continuing progress. We will continue to keep your Committee Senator WILLIAMS. Well, I appreciate your statement, all of it, and we will have an opportunity to discuss this particular matter further. Thank you very much. Mr. Walter F. Thomas, vice chairman of the board, Manufacturers Hanover Trust Co., New York, and chairman, steering committee, New York Clearing House Association. STATEMENT OF WALTER F. THOMAS, VICE CHAIRMAN OF THE BOARD, MANUFACTURERS HANOVER TRUST CO., AND CHAIRMAN, STEERING COMMITTEE, NEW YORK CLEARING HOUSE ASSOCIATION, ACCOMPANIED BY JOHN F. LEE, EXECUTIVE VICE PRESIDENT, NEW YORK CLEARING HOUSE ASSOCIATION Mr. THOMAS. Mr. Chairman, my name is Walter F. Thomas. I am vice chairman of the board of Manufacturers Hanover Trust Co. of New York. I appreciate the opportunity of appearing today to express the views of the New York Clearing House Association on proposed legislation affecting the transfer, clearance, and settlement of securities' transactions. The New York Clearing House Association is an association of 12 commercial banks in New York City. Sitting with me is Mr. John F. Lee, executive vice president of the association. We have submitted a formal statement to the subcommittee. I won't read it in full because I believe it speaks for itself. Rather, I would like to summarize the position of the association. By way of background, let me point out that the 12 member banks of the New York Clearing House Association act as transfer agent or cotransfer agent for approximately 95 percent of the issues which are listed for trading on the New York Stock Exchange and the American Stock Exchange. They also act as registrar or coregistrar for approximately 81 percent of these same issues. Moreover, the member banks perform similar services for many issues that are traded over the counter, and they act as paying, issuing, and transfer agents for most of the bonds issued by the Nation's large corporations. In addition, the 12 banks alone hold for the account of their customers in excess of 2.8 billion shares of stock having a market value of at least $108 billion, which are eligible for deposit with an appropriate depository. I would like to talk for a few minutes about transfer agents and registrars. I submit that the job of the stock transfer agent is basically a very simple debit and credit operation. The transfer agent receives from the owner or his agent the old certificate with the proper endorsement and a signature guaranty, together with instructions as to the name, address, and social security or taxpayer number of the new owner. The transfer agent checks the genuineness of the certificate, the fact that the endorsement is exactly as the owner's name appears on the face of the certificate, and the authenticity of the signature guaranty. It then refers to its records to make sure that the particular certificate or certificates are actually held by that owner and that there are no stops or other legal impediments to the transfer. The new certificate or certificates are then issued in the name of the new owner with address and social security number or taxpayer number included. The issuing company's books as maintained by the transfer agent are then updated to record the debit of the old certificates and the credit of the new certificates. The registrar then reviews the old and new certificates to make sure that there's been no overissuance which is the registrar's principal function and responsibility. This transfer of securities is one of the simplest operations that we perform in the bank provided the documents are presented to us in proper form. There are always problems of peaks and valleys in the volume of work and we are expected to staff for normal wings. There are also situations in which computers do not function because of blackouts, brownouts, hardware or software failures. But I cannot conceive of any legislation that would eliminate these problems. It is unquestionably true that the difficulties of bank transfer agents during the paper crunch stemmed primarily from the condition in which the work was received. When the instructions call for the transfer of 300 shares and the envelope contains 200 shares or 400 shares, or the endorsement is not proper or where the signature guaranty is missing or contains a signature which has not yet been furnished to the transfer agent or the name of the transferee is missing or there is no address-in any of these cases, there is nothing the transfer agent can do except return the items to the transferor or his agent. I can't believe any legislation affecting transfer agents would correct these situations. So-called legal transfers-for example, estates, trusts, joint ownership, foreign ownership-are a completely different ball game. While much has been done toward uniformity of requirements for such transfers, we are still subject to the inconsistencies of the laws of the individual States of incorporation as well as to the requirements laid down by the individual corporations for which the transfer agent acts. Legislation applicable to transfer agents will not simplify these problems. The possibility of any agency establishing personnel standards, either in terms of quality or quantity is just beyond me. We did have personnel problems during the crunch, primarily because so many of our employees were being bought away from us for the so-called backrooms. Fortunately, we were able to call upon senior personnel from other areas of the bank in order to keep the work flowing and the schedules_reasonably tight. I can't imagine any legislation or dicta of a regulatory agency which would cure such problems. I would also submit that there are many ways with computers, mechanical equipment or even manual systems to produce the simple transfer operation. The determination as to the particular means and methods adopted depends upon the individual situation, with due regard for volumes, peaks and valleys and the number of issues involved. Neither legislation nor regulation should decide these matters. They should be determined in the world of competition, economics and the ultimate benefit to the user who is of course the stockholder. Having said all these things on the negative side of legislation and regulation, I would like to state most strongly our support of regulation as to performances because this is the name of the game. Regardless of the electrical or mechanical equipment used, regardless of the types and numbers of people involved, regardless of the methods, systems, and flows of work, the turnaround schedules, the audit trails, and the consistency and accuracy of records much be maintained. But we |