STATEMENT OF PETER DEL COL, PRESIDENT, BRADFORD COMPUTER & SYSTEMS, INC., ACCOMPANIED BY LLEWELLYN P. YOUNG, VICE PRESIDENT AND COUNSEL

Mr. DEL COL. Mr. Chairman, I am president of Bradford Computer & Systems and with me today is Llew Young, vice president and counsel of Bradford. I would like to take a minute and explain what Bradford does and why it is vitally interested in this legislation. Bradford began operations in February of 1968. In the first 11 months of its existence it had revenues of under $1 million. At the present time, its rate of annual revenues is well over $40 million. This pattern of growth tells a great deal about what has happened in securities processing during these years. Bradford, through a number of joint ventures with major banks, is among other things the largest transfer agent in the world. It services some 1,200 corporations and their approximately 6 million shareholders, including some 1 million mutual fund shareholder accounts.

Bradford entered securities processing through the servicing of mutual fund shareholders. It was 1969, and many transfer agents were having serious difficulties with their mutual fund shareholder servicing. The books of the funds were out of proof, shareholders were plagued with errors and delays, and the transfer agent business was showing large losses. The small shareholder, who couldn't get delivery of his shares, was the first victim of the paper crunch. Bradford stepped in with its newly formed subsidiary, Bradford Mutual Fund Services, Inc., and took over the shareholder servicing for a handful of funds. It was a success from the start, and today Bradford services some 45 funds. The reasons for its success are several. First, it developed an excellent computer-clerical operating system. Second, it was staffed with dedicated, enthusiastic people. Lastly, it did the shareholder servicing on the simplest machines that would do the job, at centers dedicated solely to shareholder servicing. It was a professional performance. Many banks, on the other hand, had treated shareholder servicing as a stepchild, to be done on the banks' gigantic computer complexes only after all of the other and more profitable banking matters had been attended to. Bradford had only one matter to attend to shareholder servicing.

In 1971 Bradford entered stock transfer for commercial companies with another subsidiary, owned largely by it and partly by Marine Midland Bank. This subsidiary took over the corporate agency division of Marine Midland, including that division's personnel. Marine Midland remained the named transfer agent, but Bradford did the actual work.

This joint venture with Marine Midland was followed in March of 1972 by a similar arrangement with Bankers Trust Co. In December 1972 a similar arrangement was made with Franklin National Bank. Most recently, in April of this year, a similar arrangement was made with Mellon Bank in Pittsburgh. In connection with each bank, Brad

ford operates a facility dedicated entirely to stock transfer. At one of these facilities Bradford took over a stock transfer department that was servicing 725,000 shareholder accounts with close to 500 employees. At the present time this facility services 1,400,000 shareholder accounts with less than 250 employees.

The chief reason for Bradford's success in stock transfer operations is that it provides all shareholders with complete shareholder services. This is the same small shareholder that the industry has been prone to forget in the past few years, and who recently has begun to forget the industry. A transfer agent can and should do much more than just transfer stock. Bradford is gradually becoming a shareholder servicing agent. It is providing, and planning to provide, individual shareholders with a number of important services which the securities industry, as it is currently constituted, has found unfeasible or uneconomic. These services include investment of dividends and cash payments for individual shareholders through bulk purchases; custody safekeeping in the form of certificateless book-shares, regardless of the size of the individual shareholding; gradual liquidation and systematic withdrawal of proceeds of sale for retirement or other purposes; and direct book-share transfers through debit/credit entries without certificate issuance-unless requested.

Because of the severe back-office crisis, the last few years have seen accelerated attempts to modernize the system of buying and selling securities and delivering certificates. Particularly to brokerage houses and banks which execute large trades, it has become clear that the financial risks involved in long delays in getting certificates out of some transfer agents could not continue. Some other safe entity had to be created in which existing certificates could be warehoused under one name and transfers among the warehousers-more properly, settlements-accomplished by bookkeeping entries of debits and creditsvery much like the wheeling from one cage to another of the gold bars in the mythical balance of payments room of the Federal Reserve.

But 2 years ago the only entity legally able to run a depository warehouse was a stock exchange, through a subsidiary called a clearing corporation under a State's Uniform Commercial Code. While brokerage houses could use that warehouse, banks were unwilling to relinquish custody of their enormous security holdings to a depository over which they had no control and no part of the action. So the securities and banking industry pushed for amendments to the Uniform Commercial Code in various States-and have in part succeeded to allow banks and certain other regulated industries-insurance companies and mutual funds-which hold large blocks of securities to run the warehouses in connection with the stock exchanges. Under the pressures of their own immediate needs and the desire to get a quick handle on part of the problem, the use of the warehouse was limited exclusively to owners of stock of the warehouse corporation-not everyone is eligible. In fact, over 30 million shareholders are not eligible. And the actual custody of the certificates will largely be farmed out to the bank owners of the warehouse a piece of the action. All that this means is that certain institutions store in a central warehouse stock certificates held in their own or nominee name.

There was no time 2 years ago to think of the individual stockholder who has the identical interest in avoiding delays, loss and theft of

his smaller certificate. And there was no time then to think beyond storage to the elimination of stock certificates. This committee must pause over the interests of the small stockholder and give him the same options that the warehouse gives to financial institutions, and perhaps more. It is essential to analyze the securities industry, not by add-ons to the traditional ways that transfer agents and brokers handle securities, but from an objective viewpoint of what is the most efficient and cheapest way to accomplish securities processing and transfer and at the same time to protect and involve the small investor. The depository warehouse is only the first step down that road; the next is contained in our comments on the current legislation.

Against this background, let me explain Bradford's reaction to S. 2058. Bradford strongly supports the registration and regulation of transfer agents and clearing agencies. It asks only that the regulation be consistent and that it be uniformly enforced and applied across the board to all engaged in securities processing, including banks and their subsidiaries, companies doing their own recordkeeping, professional independent transfer agents, stock exchange subsidiaries, and brokerage houses and their subsidiaries in the securities clearing business.

In one respect, Bradford believes that S. 2058 in its present form falls short of its goal, "to provide for the development of an integrated national system for the prompt and accurate processing and settlement of securities transactions."

Let me illustrate my point by telling you that at each of Bradford's stock transfer facilities the largest account by far is an anonymous account that goes by the name of CEDE & Co. As you know, CEDE is the nominee name for the Depository Trust Co.-hereinafter called DTC-formerly known as the Central Certificate Service, Inc. These CEDE accounts are getting bigger every day. This bill seems primarily designed to implement one or more DTC's to facilitate securities settlements between brokers. Bradford believes this is not enough. The small shareholder should also be served. While DTC may facilitate-at considerable expense, I might add-the settlement of securities transactions as between brokers, it does little to stem the flow of paper stock certificates among investors. We as a transfer agent are constantly peeling shares from a big CEDE jumbo certificate and giving DTC the change, or adding shares to a CEDE certificate and giving DTC a superjumbo. After all, a securities transaction results in the transfer of a security from one investor's portfolio to another investor's portfolio. So long as these portfolios take the form of the stock certificates, we still have the paperwork blizzard with all of the real or potential errors, delays, and expense that are involved.

The transfer agent has a unique potential capacity to solve this problem through the use of book shares and book-share transfers. The transfer agent and its records are at the heart of the flow of securities. With book-share transfers, no paper stock certificates are involved unless the shareholder insists. Transfers are executed through debit and credit entries on the transfer agent's books. With street name and nominee name certificates, the real flesh-and-blood shareholders are getting more and more remote from the corporations which they own. This book-share approach to recordkeeping will assist materially in bringing the corporation and its owners together.

Book shares are not a novelty. Most of the more than 8 million shareholders of mutual funds do not have certificates unless they specifically request them. Bradford estimates that over 1 million shareholders are currently availing themselves of dividend reinvestment and cash payment plans that utilize book shares rather than certificates. This is one reason why these plans can be operated so inexpensively and accurately. DTC uses book shares and makes book-share transfers for brokers, but not for investors. Securities held by brokers for customer are book shares except that they are on the broker's books, not the corporation's books. If transferred agents whose procedures and records meet the standards contemplated by S. 2058 are empowered to transfer shares on their records through the use of book-share entries, a vast amount of paperwork and errors and expense and delays can be eliminated. The legislation in its present form perpetuates the preoccupation with broker-dealer settlements and does not make provision for the needs of the average individual investor. In Bradford's view, S. 2058 should be amended in such a manner as to provide the individual investor with a securities processing system offering him the same opportunities and advantages that DTC offers to the professionals.

Annexed to my statement is an appendix setting forth the language of the amendments that Bradford recommends. Simply stated, the amendments would authorize a transfer agent to maintain a system to effect the transfer, loan, or pledge of securities without the physical delivery of securities certificates, by means of appropriate entries on its books. This is precisely the system now maintained by DTC for brokers and institutions. Each broker has a book-share account with DTC. As part of the settlement of a securities transaction, DTC transfers shares from one broker's account to another broker's account. Physical certificates do not change hands.

Under the amendments that Bradford proposes the transfer agent would provide a similar system for the individual shareholder. Each shareholder now has an account with the transfer agent showing the certificates in his name and the number of shares. Instead of issuing a new certificate and canceling an old certificate each time securities are to be transferred-as is done now-the transfer agent would simply credit one shareholder account and debit another shareholder account. No certificate would be issued unless it were requested.

For example, if the investor's holdings were in book-share form, upon their sale by him they could be transferred directly to the account of the purchaser on the transfer agent's books. In the case of settlements between brokers, shares could be transferred by book entries either directly from one broker's account to another broker's account with the transfer agent or to and from a DTC account with the transfer agent. There would be no need for a vast paper flow into and out of jumbo certificates, with documents going through many hands and each time multiplying the opportunities for error and increasing the time and expense of a transfer.

Small investors need this service as much as the banks, brokers, and institutions. Certificates can be lost, mutilated, or stolen. The small investor cannot afford a custody account with a bank-but he could afford a book-share custody account with his transfer agent. The small investor is reluctant to trust his certificates to his broker for safekeeping but book shares with his transfer agent are safe.

Bradford does not suggest that book-share transfers by transfer agents should be a substitute for DTC. It recommends them as a supplement to DTC. The present jumbo certificates could be replaced by book-share accounts with the transfer agent in the name of DTC. Broker-dealer settlements would continue to be made by DTC as in the past. The only difference is that the flow of certificates to and from DTC and the transfer agents would cease.

Bradford feels that future securities processing should not be structured in such a way as to confine it to the hands of a few major bureaucratic institutions. The average investor should not be saddled with the all or nothing risks of a single clearing system. When such a monopolistic clearing system made a mistake, it would have to be a beauty. The path should be kept open for private enterprise and the spirit of competition. Bradford as a transfer agent is prepared to effect book-share transfers in the manner that I have described the minute that a bill authorizing it becomes law. It is equipped to do so today.

Bradford's proposed amendments do not require transfer agents to effect securities transfers through book-share recordkeeping. They only permit them to do this. The proposed amendments do not legislate the elimination of the stock certificate they merely establish the machinery for their eventual elimination, and in the meanwhile any shareholder who wants a stock certificate will get it.

[Appendix follows:]

APPENDIX

PROPOSED AMENDMENTS TO S. 2050

Insert after Section 17B (a) (3), line 11 of Page 23, the following:

"(4) Any transfer agent registered in accordance with this section shall, subject to such rules and regulations as the Commission may prescribe as necessary or appropriate, have the right to maintain a system either directly or through one or more affiliates to effect the transfer, loan or pledge of securities without the physical delivery of securities certificates by means of appropriate entries on its books, and any such transfer, loan or pledge shall have the same legel force and effect as if the same were carried out by a clearing agency or clearing corporation acting pursuant to applicable state law."

Delete the second "and" in line 21 of page 22.

Delete period in line 16 of page 22 and insert:

"and the maintenance of a system for effecting a transfer, loan or pledge of securities by bookkeeping entry."

Delete "or" in line 25 of page 3. Delete period after "securities" in line 25 of page 3 and insert:

"or (E) maintaining data processing or other bookkeeping records of holders of such securities and a system for effecting the transfer, loan or pledge of such securities without the physical delivery of securities certificates by means of appropriate entries on its books."

Senator WILLIAMS. Thank you very much, Mr. Del Col. You certainly have come into a tangled business with a very efficient system of meeting a particular need in the securities industry.

Mr. DEL COL. Thank you.

Senator WILLIAMS. When did we last talk? Was that last year or the year before?

Mr. DEL COL. About 2 months ago.

Senator WILLIAMS. Was it that it seems like 2 years ago. A lot has happened. Let me ask you, where is your business operation?