on a wave of improvement you see that this legislation is still

necessary.

Mr. BIRK. That is correct.

Senator WILLIAMS. I appreciate it again.

I wonder, Mr. Birk, as an operations officer of an individual securities firm, could you describe for us the economic consequences of the operational segmentation which as you have described as characterizing the current status of the securities industry's paper processing efforts and its regulation?

Mr. BIRK. Senator, are you referring to what might be saved, on the cost is that your question?

Senator WILLIAMS. Yes.

Mr. BIRK. We have given some thought to that question. Although we do not have specific numbers, as the bill is proposed, which would unify all the clearing and depository systems and would probably get rid of the certificate between settlements on the Street, so to speak, we can certainly see a 25- to 30-percent saving in the home office or the back office expense, as a result of this kind of unifying action. Mr. Chalmers, do you want to comment?

Mr. CHALMERS. I concur with Mr. Birk's judgment. Within the home office itself we should have a saving of somewhere between 25 to 30 percent with the implementation of a single clearing and depository facility.

Senator WILLIAMS. That is a significant percentage.

Mr. CHALMERS. Yes.

Mr. BIRK. One further point, we have been paying for the establishment and maintenance of as many as 12 or 13 different systems, but perhaps more significantly, we have been paying rather dramatic interest costs as a result of our inability to move securities promptly due to segmentation. This is probably the most significant cost.

Senator WILLIAMS. Well, do you have anything further? Thank you very much, gentlemen.

[Discussion off the record.]

Senator WILLIAMS. We shall reconvene here with the statement and appearance of Mr. Bernard O'Connor, president of U.S. Banknote Corp.

Mr. O'CONNOR. I am senior vice president, not president.

Senator WILLIAMS. All right.

STATEMENT OF BERNARD O'CONNOR, SENIOR VICE PRESIDENT, U.S. BANKNOTE CORP., ACCOMPANIED BY WILLIAM J. VANDEN HEUVEL, COUNSEL

Mr. O'CONNOR. This is Mr. William Vanden Heuvel, my codirector. Senator WILLIAMS. Very nice to have you. The forum is yours, sir. Mr. O'CONNOR. Senator, we would like to talk about certain aspects of S. 2058, particularly in connection with the SEC taking steps to bring about the elimination of the negotiable stock certificate as a means of settlement among brokers or dealers of transactions consummated on national securities exchanges or by means of instrumentalities of interstate commerce, the study and investigation of so-called street-name registration problem; and the empowering the SEC to prescribe the form or format of the stock certificate.

While we do not object to the overall goal of this proposed legislation, we do wish to call attention to segments which could adversely affect the investor.

I will subsequently, in my testimony, discuss measures that are necessary to protect the individual investor.

We last appeared before your subcommittee on September 30, 1971. At that time we pointed out that the stock certificate, a readily negotiable instrument, is a permanent authentic detailed record of shareholder ownership. Today we reaffirm that position.

An investor having the stock certificate need not be concerned if his broker fails or even if any computer fails. He is assured of receiving directly from the issuing corporation-all communications including those required by the SEC. A recent article in the New York Times touched on other reasons why the stock certificate is desirablethe pride of possession-using stock for collateral.

Many brokers urge their customers to take delivery so the brokers can avoid the responsibility of dividends, proxies, safe storage, and monthly statements.

The distrust because of continuing failures and threats of failures in the street is heightened just by reading the newspapers. For example, the Wall Street Journal reported on June 11, 1973, that, as an aftermath of the Weis securities fiasco, the SEC met privately with exchange officials to review the exchange's surveillance program (or early warning system). A SEC enforcement official was quoted as saying, "If you've got fraudulent statements, I guess a guy can beat the system."

This meeting wasn't an alarmist step indicating any failure of the exchange's early warning system. Eleven days later, on June 22, 1972, the New York Times reported that "Nine member firms have been placed under special, intensive surveillance by the New York Stock Exchange because of financial difficulties and some of them probably will have to be liquidated" according to a big board official. These nine firms were among 68 member firms that had been placed on the early warning list.

In the same article it was reported that one member firm allegedly spread false rumors about another member firm's financial condition. This environment demands the protection of the small investor— not with SIPC, but with his stock certificate.

(2) In 1971 we pointed out the vulnerability of the computer, particularly in two areas: fraud and manipulation. I suppose this point could be currently confirmed just by equity funding. However, now some 140 cases of computer abuse have been documented by a specialist in computer-related crime. These cases included vote fraud, manipulation for profit, manipulation for theft of services, theft of confidential information, and vandalism. The perpetrators or suspects were a policeman, claims and welfare employees, private citizen, elected official, and electronic data processing employees. Interestingly, not one computer abuse was discovered through routine audits or checkups. Every time, the guilty party was uncovered through some chance event-like the teller for a savings bank in New York charged with embezzling $1,500,000. He was dicovered when police raided a bookmaking operation and found his name as a $30,000-a-day bettor.

(3) In our previous appearance here we pointed out that the depository concept as well as the proposed certificateless society poses serious problems.

One involves street name layering superimposed on the present nominee practice. This will further remove and alienate the investor from the corporation (or corporations) in which he owns stock, and make a mockery of shareholder democracy. This problem, acknowledged in your proposed legislation requiring a study by the SEC, makes the retention of the stock certificate increasingly important.

(4) In 1971 we proposed, as a feasible and sensible intermediate paperwork system, the adoption of a man and machine readable stock certificate-readable by means of optical scanning-together with standardization of supplementary forms involved in the stock processing procedure. It is interesting to note that the New York Depository now is using the optical scanning technique for the control and movement of stock certificates in its possession.

As we emphasized before-and our viewpoint applies more so today-in any of the studies relating to the securities industry problems there has been little, if any, representation by corporations or the average shareholder. Reecntly, at the initiative of the American Stock Exchange Listed Company Advisory Committee, corporations have organized to make known their concern about the withdrawal of the small investor from the marketplace, the ever-shrinking number of stockholders, the liquidity of the stockmarket, and the drying up of the new issue market.

The fact is that in this intervening period the market has been inactive-small investors have looked elsewhere and the new issue market is at its lowest ebb for many years.

The small investor unfortunately has no organized representation and while many reasons are given for his absence from the market the fact remains that he has deserted it.

The exchanges and some member firms are developing public relations programs to bring him back.

In this connection, let me quote a few pertinent excerpts from a recent study on small investors conducted for the New York Stock Exchange. The study points out, among other facts, that small investors tend to view the securities industry with an air of caution, particularly in regard to the industry's financial stability-two-thirds feel that their stock certificates are safer in their own hands than in their brokers' custody.

We strongly suggest that one way to bring the small investor back is to assure him that he will receive his evidence of proprietary ownership, the stock certificate, and not be at the mercy of irresponsible brokers and computers. Computers have yet to convince us that they are fraud proof.

Speaking directly to vour proposed legislation:

(1) You direct the SEC to bring about the elimination of the stock certificate as a means of settlement in brokers or dealers transactions. Your introductory statement to the legislation says that this provision would in no way preclude the individual shareholders from demanding and receiving certificates as proof of ownership of the shares. This legislation, in our opinion, falls short in one important aspect. The legislation must spell out the automatic right of the investor to receive his

stock certificate. I respectfully submit that such language must be a part of any legislation that is ultimately developed.

The reasons are real. Under the provision related to the elimination of certificates in broker or dealer transactions, the investor will be induced not to take his stock certificate, particularly by those brokerdealers who become members of depositories. If this be so, then this legislation will be misused to accomplish the immediate transition to a certificateless society. In reality, the selling investor will give up his certificate for cancellation and the buying investor will be induced to leave his stock with his broker. So the "street" will be able, unless specifically regulated, to effect by indirection what obviously is not intended by your proposed legislation. This is similar to the use of tax loophole laws for benefits beyond which they were intended at the time of passage.

Our other objection is to the word "demand." It doesn't clearly identify the mechanics by which the investor makes his demand. More importantly, why does he have to demand? Certainly much legislation has been passed to protect the consumer-even against himself.

Our position is clear the investor must be protected like any other consumer in his inherent right to receive, promptly, whatever he purchases.

Failure to provide this protection to the public will cause the same relative chaos that occurred in the 1969-70 era when the SEC was inundated with complaints of individuals demanding their stock certificates.

(2) Your proposed legislation authorizes the SEC to make a study of street name registrations. This important study should be completed before a final decision is made relative to the elimination of certificates in broker-dealer transactions. We make this suggestion because the study will delve into the very heart of corporate-stockholder communications gap, which is seriously affected because of street name registrations.

(3) Another provision of your proposed legislation requires that securities be in a form or with a format as prescribed by the SEC. In our opinion the SEC has long had the right to develop the form or format of the stock certificate. The history over recent years has indicated their all-too-ready acceptance of the punchcards, which proved unworkable. Later, under Commissioner Casey, the SEC readily endorsed the total certificateless society.

A very current development-and I don't know, Senator, whether your subcommittee or the SEC are aware of this next point: A very current development is the use of the single denomination certificate which today is actually being used, on a pilot basis, despite a critical, objective report that it is extremely vulnerable to alteration by fraud. artists. Therefore, we suggest that any further development in the form or format of the stock certificate be required to be reported by the SEC to your committee prior to adoption—in the public interest. We, of course, will make our proposals directly to the SEC at the proper time.

We feel that your proposed legislation is an honest attempt to attain your objective in an orderly fashion, through long-range, wellconceived planning. However, we feel very strongly that in planning for the future you cannot ignore what will happen tomorrow.

Many significant contributions could be made now for over 30 million constituents who will be affected by your legislation. We urge the adoption of our proposal that investors be given the legislative right to receive their stock certificates without demanding them.

Your bill authorizes the SEC to straighten out the securities industry. But while this is going on, the Commission should be subject to another mandate-protecting the rights of investors, particularly the small investors. Increased concern for them should ultimately result in decreased apathy they now manifest toward the "Street."

In essence, we are requesting that you insure your concern for the individual investor by guaranteeing him protection in the legislation. Thank you very much for your kind attention.

Senator WILLIAMS. Well, we appreciate your statement, Mr. O'Connor. I'll tell you, I have to leave. There is a vote in progress, one that is important to some of my other work.

You are familiar with how we handled the stock certificate in terms of the individual investor last year?

Mr. O'CONNOR. That is correct.

Senator WILLIAMS. And we still subscribe to that principle. We did in that bill and we do in this bill allow individual investors to hold certificates. We certainly will include it in our report, unless the bill language is changed, that might in terms of an option. You put it in terms of a mandate, however, a mandate that the investor must get his certificate.

Mr. O'CONNOR. Yes. In that connection, we strongly feel while your introduction covers the point of demand and receive, the legislation does not; and therefore, you have what I analogize as a tax loophole situation. I can see and virtually predict that there will be misuse now even though your legislation requires further legislation for ultimate elimination. You ask the SEC for recommendations, if any, for further legislation to ultimately eliminate the stock certificate, if I understand it correctly.

Senator WILLIAMS. Well, yes, in the broker-dealer transaction. That is a significant link. The bill says: "To bring about elimination of the stock certificate by means of a settlement among brokers or dealers in transactions consummated on national securities exchanges."

Mr. O'CONNOR. Your last subparagraph has words to the effect "and recommendations, if any, for further legislation to eliminate the stock certificates."

Senator WILLIAMS. As a means of settlement, yes, and the last sentence, "recommendations, if any, for further legislation"-another step-"to eliminate the stock certificate." I certainly agree with you that the "street name" study should antedate any conclusions here, no doubt about that. I wish we could discuss this further but this vote is one that I have to make. Thank you very much.

[Recess]

Senator WILLIAMS. Mr. Peter Del Col, president of Bradford Computer & Systems, Inc. We are pleased to have you.