fer functions and measures and personnel standards for safe handling and custody of securities, the bill concedes the competence of these agencies to evaluate and determine proper performance standards. Accordingly, it would seem logical to delegate to these agencies the responsibility for adopting substantive rules and regulations as to minimum standards of performance.

Nevertheless, and this is the feature which we oppose, S. 2058 provides that the SEC shall have the power to set the substantive standards for bank transfer agents and registrars both in terms of internal performance and external compatability with other persons involved in different facets of the securities handling process. If the stock transfer and registration activities of banks were not already thoroughly regulated and examined by the bank supervisory agencies, perhaps we could understand the need for the Commission to establish standards as to the performance of transfer functions, measures and procedures for safe handling and custody of securities. But this power presently exists in, and is utilized by, banking agencies.

Bank examiners are thoroughly familiar with the operational and personnel requirements for a safe and efficient bank transfer and registrar department. Bank examiners have been increasingly vigilant in the attention they have paid to corporate trust and stock transfer departments since the "paper-work crunch" of 1968-70. For example:

The Federal Reserve Bank of New York has completely revised its instructions to examiners, placing emphasis upon performance time, back-logs and procedures adopted by management for monitoring the status of its own performance. The regional office of the Comptroller of the Currency in New York is now placing great emphasis during the course of its examinations upon the turn around time in stock transfer departments.

The Superintendent of Banks of New York State issues detailed instructions to examiners relating to the operation of stock transfer departments of State chartered banks. New York State has also created a special automation unit whose employees are trained in special techniques for checking on transfer agents whose operations have been automated.

In the course of their examinations, examiners check for compliance with stock exchange rules and regulations and make recommendations for improvements in the operations of these departments. In doing so they apply the principle that sound banking practices require that bank transfer agents and registrars act promptly and efficiently.

In these circumstances we believe it would not be desirable to inject a new regulatory agency into the supervision and regulation of bank transfer activities. Indeed, there is danger that such a step would be counterproductive. The uncertainties that would be occasioned by the SEC's entry into the regulation of banking activities, and the possibilities for conflict between the requirements prescribed by the SEC and those prescribed by the bank regulatory agencies, which obviously must continue to exercise their present responsibilities for the examination and supervision of banks, could produce significant delays, conflicts or other difficulties in achieving further improvements in the handling of securities transfers.

If the SEC were, for example, to specify personnel standards which are appropriate for a non-bank transfer agent, it might be applying considerations which are not relevant to a bank transfer agent which is providing a variety of related services such as communication to and from shareholders, dividend disbursements, etc. The bank transfer agent would be required to serve two masters because nothing in the bill would eliminate the existing bank regulatory agency control over this department of a bank. The resulting additional expense and administrative burden is not in the public interest; in fact it might impede efforts to improve transfer services even further.

Moreover, the on-going responsibilities of maintaining books and records for two or more regulatory agencies, of updating registration information, and generally of conforming to a multiplicity of rules and reporting requirements would represent a needless and unfortunate drain upon transfer-agency resources. It would be ironic if, in the name of decreased paperwork and increased efficiency, transfer agents were required to increase paperwork and to divert resources from their transfer operations solely to accommodate a duplicative regulatory regime.

In other areas of securities regulation, Congress has recognized the desirability of avoiding duplication, with respect to supervision of the activities of banks and has allocated responsibility to the agency with expertise in the banking field. No case has been made for subjecting banks to duplicative regulation with

respect to their securities transfer activity. In fact, there is every reason to retain the jurisdiction of the federal banking agencies over securities transfers by banks, just as the 1964 Amendments to the Securities Exchange Act of 1934 established such jurisdiction with respect to the outstanding securities of banks.

In short, we believe that no new regulatory authority over transfer agents is necessary or desirable. The banking agencies already possess fully adequate authority to continue their supervision in this field, and the grant of such authority to the SEC would be duplicative and could be counterproductive.

DEPOSITORY PROVISIONS

Our position on the provisions of S. 2058 relating to securities depositories coincides with the position expressed to the Committee by the Banking and Securities Industry Committee (BASIC). BASIC's memorandum points out that: Banking authorities are the most appropriate agencies for the regulation of securities depositories and assignment of the task to such agencies would call forth the degree of bank participation that is necessary to maximize the public benefits of such depositories.

Banking authorities have analogous experience that could profitably be used in the regulation of depositories, and sufficient resources to do the job.

Banking authorities are not given a sufficient role in the development of depositories, particularly in rule making as to safeguards for securities and funds. The provisions of S. 2058 relating to access and management participation are deficient in that:

1. the bill would guarantee access to entities whose character or financial qualifications might actually deter the degree of participation by others needed to make depository succeed; and

2. the bill would conflict with well-established principles of corporate management by conferring representation upon non-shareholders in the adoption of rules, the selection of officers and directors, and in all other phases of administration.

Accordingly, we endorse the recommendations of BASIC with respect to the depository provisions of S. 2058.

CONCLUSION

Stock transfer and registration are only parts of the broader fiduciary, custody and agency functions performed by banks. A government agency which is not thoroughly familiar with the other activities performed by banks in the entire securities area might well adopt regulations which might be workable for a non-bank transfer agent but would be inconsistent with the standards prescribed by the appropriate banking agency. Congress has traditionally deferred to the expertise of bank regulatory bodies because it recognizes that regulation of banks requires a balancing of various interests including the solvency and integrity of the banking system. The Association urges Congress not to adopt legislation which ignores the existence of a competent group of regulators who are in the best position to prescribe and evaluate standards of performance of bank transfer agents and registrars and securities depositories in the broader context of standards of sound banking practices.

REGULATION OF CLEARING AGENCIES AND TRANSFER

AGENTS

THURSDAY, JULY 12, 1973

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING AND URBAN AFFAIRS,

SUBCOMMITTEE ON SECURITIES,

Washington, D.C.

The subcommittee met at 9:35 a.m., in room 5302, Dirksen Senate Office Building, Senator Harrison A. Williams, Jr. (chairman of the subcommittee) presiding.

Present: Senators Williams and Biden.

Senator WILLIAMS. The committee hearing will come to order.

We continue this morning on S. 2058, a bill concerning the regulation of clearing agencies and transfer agents and other matters.

First we will hear this morning from the New York Stock Exchange. Mr. James J. Needham will substitute for Samuel A. Gay. Very good. We are very pleased to have you.

STATEMENT OF JAMES J. NEEDHAM, CHAIRMAN, NEW YORK STOCK EXCHANGE, ACCOMPANIED BY SAMUEL A. GAY, SENIOR VICE PRESIDENT, NEW YORK STOCK EXCHANGE, AND DIRECTOR OF THE STOCK CLEARING CORP. AND DEPOSITORY TRUST CO.; DONALD L. CALVIN, VICE PRESIDENT, NEW YORK STOCK EXCHANGE; ROBERT C. HALL, CHAIRMAN, SECURITIES INDUSTRY AUTOMATION CORP.; AND WILLIAM T. DENTZER, CHAIRMAN, DEPOSITORY TRUST CO.

Mr. NEEDHAM. Thank you. Mr. Chairman, Senator Williams, I apologize to you and to the committee for this sudden appearance on my part, but yesterday the board of directors of the exchange made what we consider a very important decision, and as you know, I am charged with responsibility under the charter and bylaws of the exchange to speak on all major policy matters. And frankly, I welcome the opportunity to be here because it is always a privilege to appear before this committee. I have asked Mr. Gay to stand aside and, if necessary, amplify the testimony that has been prepared for him to deliver.

For the record my name is James J. Needham, the chairman and chief executive officer of the New York Stock Exchange. Accompanying me today is, seated on my right, Mr. Samuel A. Gay, senior vice president of the New York Stock Exchange and a director of the Stock Clearing Corp., and the Depository Trust Co.; also accompany

ing me, to my left, is Dr. Donald L. Calvin, a vice president of the exchange; and further to my right is Mr. Robert Hall, chairman of the Securities Industry Automation Corp., which is generally known in the industry by the acronym SIAC; and to my far left is Mr. William T. Dentzer, chairman of the Depository Trust Co.

We appreciate the subcommittee's courtesy in giving us the opportunity to present the views of the board of directors of the New York Stock Exchange on S. 2058-a bill to amend the Securities and Exchange Act of 1934, to provide for, among other things, the regulation of clearing agencies and transfer agents.

The New York Stock Exchange supports the objectives of this bill. We do have a number of suggestions for improving the effectiveness of the proposed legislation in achieving those objectives, which we offer for the subcommittee's consideration.

As the subcommittee is aware, the New York Stock Exchange has been working for more than a decade toward the goal of an integrated national system for the prompt and accurate processing of securities transactions effected on national securities exchanges and in the overthe counter markets. Our initial pioneer efforts embraced the exchange's own membership. More recently, we have been cooperating closely with other organizations in both the securities and banking industries and with others involved in the clearance, settlement, and transfer process. The subcommittee is well acquainted with these efforts and with the considerable progress that has been made to date. I think it is clear that we share with the Congress and the regulatory authorities the desire and determination to place in operation a securities processing system that will preclude any recurrence of the operations tangle experienced by the industry and the investing public during the period 1968-70. We believe it is now technically possible to create such a system. Indeed, much of the groundwork for establishing a national securities depository system has already been prepared.

Obviously, the legislation now before the subcommittee bears very closely on the work that has been done thus far, and on future develop

ments.

But before commenting on the individual sections of S. 2058, we would like to make it clear that we have some strong reservations about the appropriateness of dealing in a single bill with the regulation of both depositories and clearing corporations. We believe, in fact, that regulatory guidelines for these two very different types of entities might more effectively be set forth in separate legislation.

The existing clearing corporations, which have the primary function of balancing and settling trades, are integral parts of the individual exchanges and the over-the-counter market. Depositories have a quite dissimilar function which centers on maintaining custody of securities in a computerized system which aims at immobilizing the stock certificate. The fact that efficient clearing corporations and depositories will both contribute to minimizing potential back-office problems for brokers should not obscure the fact that the two types of entities operate differently, have different though overlapping clienteles, and face different problems with respect to attracting maximum participation. Most of our comments today refer to those provisions of S. 2058 which deal primarily with clearing corporations. But we would like to make it clear that the New York Stock Exchange generally supports

the views expressed by the Banking and Securities Industry Committee on those provisions of the bill having to do only with depositories.

Within the context I have just outlined, we would like to proceed briefly to comment on the individual sections of S. 2058.

Section 1 of the bill would amend the 1934 act, by adding to its purpose clause the need for developing an integrated national system for the prompt and accurate processing and settlement of securities transactions.

The exchange agrees, certainly that an integrated national depository system is urgently needed. As the subcommittee knows, the exchange assumed leadership in developing the Central Certificate Service which, since May 11, has been known as the Depository Trust Co. Most recently, our efforts have centered on encouraging wider participation in this prototype computerized securities depository-including preparations for coordinating and interfacing with regional depositories in a series of linkups which would, in fact, constitute a coast-tocoast depository system. We recognize, of course, that the concept and operations of such a system affect interests beyond those of the securities industry. Accordingly, the Depository Trust Co., has expanded its board of directors to include-in addition to representatives of the various major elements of the brokerage industry-representatives of the insurance, banking, and investment company industries. All of the gentlemen that we have appointed to that board are outstanding in their field of endeavor, including one former Chairman of the Securities and Exchange Commission. We believe this expanded board will play an important role in determining the shape and policies of the emerging national depository system.

The exchange also fully supports the development of a national clearing system. We also believe that it is necessary to arrive at a common definition of the clearing function which-apart from the depositorypresently involves two principal operations: Trade comparison and accounting processing.

Trade comparison involves reporting, validating, and comparing trading activities to obtain an approved contract listing of all trades. Each market today performs its own trade comparison similarly. However, efforts to consolidate in this area are not being pressed, since the function itself will be eliminated as each market advances toward the goal of the locked in trade.

The second clearing operation-accounting processing-involves netting and consolidating all the compared trade information to produce netted settlement instructions to all parties involved in each trade. Two systems are presently in use. One is the delivery balance order system used by the New York and American Stock Exchange clearing corporations. The second is the continuous net, or net-bynet system, used by the other major clearing corporations.

When alternative approaches to implementing a national clearing system are examined, it appears clear that a continuous net accounting system, closely linked to a national depository system, not only would pose the fewest implementation problems, but would also offer the maximum advantages to both the securities industry and the investing public.

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