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Asia Ltd. all at the same address and telephone number. (2) The authority of the Depository Trust Company Southern, and China Airlines, thought to be another and Cede and Company to vote shares of stock held either CIA operation-hive offices in the same building, at in the name of Cede and Company or in the name of 1725 K St. NW. Civil Air Transport is the old name for the Depository Trust Company and their practice in Air America, which was founded after World War II this regard. Is there any legal restriction against Cede by Gen. Claire Chennault, commander of the famed and Company or the Depository Trust Company voting Flying Tigers.

shares held by them in the absence of instruction from More serious, they contended, Southern and its officials participants (e.g. brokers and banks)? may have violated federal law by transferring control of (3) Who are, and who are eligible to be, participants in the airline on several occasions without CAB approval, and the Depository Trust Company and Cede and Company? by creating at least one interlocking relationship with a (4) What, if any, is the policing mechanism to insure second corporation engaged in aeronautics, also without that voting instructions by such participants are actually CAB approval.

followed by Depository Trust Company or Cede and ComThey pointed out that in January 1957, one Frederick pany personnel? Who are the officials responsible for C. Moor, Southern's founder, owned 98 of Southern's 100 executing these voting instructions? shares of outstanding stock, according to CAB records. We should appreciate your response as soon as possible;

But by August 1962, Moor had been joined by Williams, a reply no later than September 5 would be most helpful. Brundage, and McGuire. As of Sept. 8, 1964, 84 shares were

Sincerely yours, registered in the name of Suydam & Co., which turned out to

Vic REINEMER, be a "street name" for Moor, Williams, McGuire, and

Staff Director, Subcommittee on Budgeting, Brundage.

Management and Expenditures. There was no explanation of how Suydam' had come about-but by 1972 it had disappeared along with Moor's name (he died recently) and the only stockholders were

THE DEPOSITORY Trust Co., Williams, Brundage, and McGuire. (Emphasis added.)

New York, N.Y., September 10, 1973. It was just after Brundage and McGuire had come to the Mr. Vic REINEMER, firm around 1960 that massive amounts of money began to Staff Director, Subcommittee on Budgeting, Management and flow into the company from Air America, widely known as Expenditures, Committee on Government Operations, an arm of the CỦA. About the same time Southern was U.S. Senate, Washington, D.C. given a contract for government inter-island business in

DEAR MR. REINEMER: We are pleased to respond to the South Pacific under what one individual called strange your letter of August 23, 1973 requesting information with circumstances. CAB records indicate that Southern's largest single Trust") and Cede & Co. in connection with the Subcom

respect to The Depository Trust Company (“Depository source of revenue each year starting in 1963 has been something identified as "Logistical Support Group con

mittee's study relating to information filed with govern

ment agencies regarding stockholders of major corporatract revenue.” From 1963 through 1972 revenue from

tions. In response to your inquiry we are providing the this source totaled nearly $6.9 million. Southern's annual revenues total about $9 to $10 million a year, and its profits following information (answers are numbered in accord

ance with the numbers of the questions in your letter of for the most recent 12 months is about $382,000.

August 23): Southern's competitors in the air charter business con

(1) We are enclosing copies of the by-laws and the ortend the government money means “there is a strong pre- ganization certificate and, although not requested in your sumption ... that a substantial part of this sum repre- letter, the current interim) and proposed rules of Desents a direct or indirect subsidy paid to Southern by the pository Trust.' We are enclosing both the rules as now in Government."

effect and the proposed rules, which have been substantially approved by the Securities and Exchange Com

mission, because the proposed rules reflect our new course THE ROLE OF DEPOSITORY TRUST CO., AND of action and are expected to become effective before the CEDE & CO.

end of the year.

August 23, 1973. Mr. William DENTZER, Depository Trust Co., New York Stock Exchange, 44 Broad Depository Trust is a limited purpose trust company St., New York, N.Y.

chartered under the Banking Law of the State of New DEAR MR. DENTZER: To assist us in completing a

York and is a member of the Federal Reserve System. study relating to information filed with government Depository Trust is presently a wholly-owned subsidiary agencies regarding stockholders of major corporations, of the New York Stock Exchange, Inc. (NYSE”) and is

“ Chairman Metcalf would appreciate receiving from you

a "clearing corporation” as that term is defined in Section information on the following matters:

8-102(3) of the Uniform Commercial Code (“UCC'). (1)

The current place of the Depository Trust Company Depository Trust is engaged in the business of effecting the and Cede and Company within the structure of the New transfer and pledge of securities deposited with it by its York Stock Exchange, their authority and responsibility participants through entries on its books, as permitted and how they differ from those of the Central Certificate by UCC 88 8–320(1) and (2). Depository Trust accepts Service. Details of this change and what it portends for deposits of eligible securities listed on the NYSE, the the future will be appreciated. As documentation we

American Stock Exchange, the National Stock Exchange would like to receive the articles of incorporation and the or traded over-the-counter from its participants which are by-laws of the Depository Trust Company.

then credited to the participants' accounts. After being so · For previous references to Suydam & Co., see p. 188 and p. 302.

*Retained in committee Alles.

WHOLLY OWNED BY NYSE

a

NEED TO REDUCE PAPERWORK

credited, the securities may be pledged, released from in a manner similar to its recent amendment in the State pledge, transferred and retransferred pursuant to the of New York so as to permit ownership of the stock of a foregoing provisions within the system by computerized "clearing corporation" by others than a national securibook-entry without movement of the certificates represent- ties exchange or national securities association, it is coning such securities, which remain in the custody of De- templated that shares of the capital stock of Depository pository Trust or its custodian banks.

Trust will be available for purchase by or for users of the In order to facilitate subsequent transfers, all securities Depository Trust system. Share ownership would be in deposited by a participant with Depository Trust are accordance with a formula allocating the number of immediately registered in the name of Cede & Co., a name shares which might be purchased by a participant on the well known in the financial community as the nominee of basis of his use of the system. At such time, of course, the Depository Trust and the former nominee of Central NYSE would cease to be the sole stockholder of DeposiCertificate Service, Inc. and of Stock Clearing Corpora- tory Trust. tion when Central Certificate Service was a division of Stock Clearing Corporation. (The name Cede and Co. was CORPORATE FORM OF LIMITED PURPOSE TRUST CO. drawn from "certificate depository”.)

The corporate form of a limited purpose trust company was chosen primarily because of: (1) the desire of poten

tial bank participants in the system to have thorough Cede & Co, and the Central Certificate Service division bank regulatory agency examination of the operations of of Stock Clearing Corporation (a predecessor to Deposi- the depository holding their securities; (2) the reduction, tory Trust) were created by Stock Clearing Corporation, if not elimination, of possible legal obstacles which the a wholly-owned subsidiary of the NYSE, in response to utilization by fiduciaries of a non-banking entity might a felt need to reduce the enormous paper work burden pose; and (3) the fact that Depository Trust's status as a upon the securities industry created by the necessity of "bank” would permit it to act as custodian for other delivering paper stock certificates and bonds and, perhaps,"clearing corporations” pursuant to the provisions of putting them through a transfer agent each time a UCC $ 8-320(1)(a), thus facilitating the ultimate developtransaction was effected. (See, Subcommittee on Securities of ment of a nationwide system for the clearance and settlethe Senate Committee on Banking, Housing and Urban ment of securities transactions. Affairs, 92d Cong., 2d Sess., Securities Industry Study 14 (2) As noted above, securities deposited within the (Comm. Print 1972) and generally Hearings on Clearance Depository Trust system are held only in the name of its and Settlement of Securities Transactions Before the Sub- nominee Čede & Co. As record holder, Cede & Co. is committee on Securities of the Senate Committee on Banking, under the applicable law of most jurisdictions the only Housing and Urban Affairs, 92d Cong., 2d Sess. (1972).) entity actually entitled to vote such securities. Cede & Co. As an interim step toward the ultimate creation of never votes such securities except on the instructions of the Depository Trust the Central Certificate Service division Depository Trust participant (received by Cede & Co. of Stock Clearing Corporation transferred its business to through Depository Trust) to whose account such securiCentral Certificate Service, Inc. (“CCS”), a New York ties are credited on the relevant record date. It is the corporation wholly-owned by the Exchange and created consistent and careful practice of Cede & Co. (via Deposifor that purpose. Cede & Co. thereupon became the tory Trust) to obtain instructions from Depository Trust nominee of CCs. On May 11, 1973 the business of CCS participants as to the voting of securities credited to the was transferred to Depository Trust and upon that Depository Trust account of such participants and to transfer Cede & Co. became the nominee of Depository vote such securities only as and to the extent that instrucTrust and CCS ceased to exist as an operating entity. tions are received. Cede & Co. is specifically forbidden to

The basic operations of Depository Trust do not sig; vote such securities without instructions. Depository nificantly differ from the operations formerly conducted Trust also, to a limited extent and as a pilot project, by the Central Certificate Service division of Stock transmits to participants proxies executed by Cede & Co. Clearing Corporation and by CCS. The variety and covering the participant's deposited shares so that the extent of those services and the people served, however, participant may complete the proxy and forward it to the have been and are in a continual process of evolution so issuer. that Depository Trust participants, the securities and banking industries in general and the public interest may be better and more efficiently served. While the Central Moreover, Depository Trust itself exercises no more Certificate Service was a division of Stock Clearing Cor- discretion with respect to the voting of securities held in poration it was, of course, wholly-owned by the NYSE Cede & Co.'s name than does Cede & Co. itself. Depository and there were no outside directors on the board of Trust instructs Cede & Co. to vote the securities registered Stock Clearing Corporation. Pursuant, however, to in Cede & Co.'s name only to the extent and as Depository decisions to convert Central Certificate Service into a Trust is instructed by the participants who have such mutualized service corporation owned by and for its securities credited to their account with Depository Trust. users, a board of directors of CCS was elected by the At no time does Depository Trust direct Cede & Co. to NYSE (as sole shareholder) so as to provide representa- vote such securities without such instructions. In the event tion not only of the NYSE but also of the American that no such instructions are received such securities are Stock Exchange, the National Association of Securities not voted by Cede & Co. Dealers and banks. The same principle of representation Moreover, any lack of fidelity to the explicit voting of other than NYSE interests now prevails with respect instructions of its participants by Depository Trust or to Depository Trust and the depository's board has Cede & Co. would result in a complete lack of faith in been broadened further.

Depository Trust and in its operations (including use of At such time as UCC 8 8-102(3) is amended in sub- Cede & Co.) on the part of Depository Trust participants stantially all of the jurisdictions where it is now in force and would, of course, in turn place such participants in an

VOTING OF SECURITIES

unten able position with respect to those of their customers pared and verified and a proxy covering votes for instrucfor whom they hold securities in Depository Trust and tions not previously received is issued; the summary and upon whose direction those participants instruct Cede & the proxy are mailed to the issuer, the shares of which are Co. to vote such securities. Depository Trust participants to be voted, and in addition a voting authorization conwould in such event probably have no alternative but to taining all information received up to that date is TWX'ed, withdraw such securities froin Depository Trust so that telexed or telegramed to the corporation. The voting authey could fulfill their own responsibilities to their custo- thorization can serve as complete voting instructions to mers; and they might even feel compelled to terminate the issuer in the event the summary and current proxy, their Depository Trust membership-consequences com- and/or previously mailed proxies, are delayed in the mail. pletely at odds with Depository Trust's aim of attracting Shortly after the meeting date the issuer is provided with more and more participants to a depository system for a final voting summary of the votes. the purpose of safely immobilizing the stock certificate.

The person responsible for assuring the accurate execuThus, wholly aside from any legal restrictions upon tion of Depository Trust's processing of voting instrucDepository Trust's and Cede & Co.'s voting of securities tions from participants is the Manager of Depository within the Depository Trust system without instructions, Trust's Proxy Department. practical considerations clearly militate against such

Microfilm copies are kept of all records relating to action.

voting instructions. RULES OF DEPOSITORY TRUST

Now that the depository has transferred its operations (3) We are enclosing a list of the participants of De- to a trust company and is subject to examination by the pository Trust as of July, 1973. The requirements for Federal Reserve Bank of New York and the New York eligibility for participation in Depository Trust are set State Banking Department, we anticipate that bank exforth in Rules 2 and 3 of the current Rules of Depository aminers of both institutions will make regular examinaTrust (which are interim Rules drawn from Stock Clearing tions of the Proxy Department's operations to assure their Corporation's former rules as they affected depository integrity. One of the reasons for transferring our operations operations) and in Rules 2 and 3 of our proposed Rules, to a trust company was to assure potential participants copies of which are enclosed, as noted above. Depository

and others concerned that an independent, external reTrust has proposed to the Securities and Exchange Com- view of our operations was made by public authorities. mission that eligibility for membership be broadened to include broker-dealers, clearing corporations-depositories,

Let me add one important point in closing. banks, insurance companies, investment companies and other financial institutions. Cede & Co., of course, has no participants in the sense of participation in the operations

OBLIGATION TO IN FORM of a “clearing corporation". (4) On the return by the participant to Depository

While Depository Trust recognizes its obligation to fully Trust of the filled-in voting instruction form sent by

inform any issuer of a security of the participants in the Depository Trust in advance of meeting dates or other

depository which hold that security, and the amount of dates by which shareholder action must be taken, the

their holdings, we also recognize that governmental bodies form is recorded by Depository Trust personnel for com

can have a legitimate interest in such information as well.

We therefore have made it clear in our proposed Rules puter processing by key-punch and then filed. As voting instructions come in, proxies are sent to the issuer and

(sub-section (f) on page 12) that Depository Trust is summaries are prepared (on a daily or every-other-day

authorized and obligated to provide “to any appropriate basis) which are verified by other Depository Trust per

governmental authority” information on the amount of sonnel on a line-by-line basis against the voting instruction

securities credited to the account of any participant. forms received up to that time. Any discrepancies appear- I would be happy to answer any further questions on ing are then corrected.

this important subject, and I would welcome any com

ments or suggestions you may have growing out of your FINAL SUMMARY PREPARED

study. On the day before the meeting a final summary is pre

Sincerely yours,

W. T. DENTZER, Jr. 2 Retained in committee files.

Appendix D

TABLES TO PART II: THE NEED FOR DISCLOSURE REGARDING CONCENTRATION OF VOTING RIGHTS AMONG INSTITUTIONAL INVESTORS

APPENDIX TABLE 1-A.-CONCENTRATION OF STOCK HOLDINGS DATA FOR A SAMPLE OF 50 STOCKS HELD IN HIGH CONCENTRATIONS PRIMARILY BY 50 BANK TRUST DEPART. MENTS: (FULL VOTING RIGHTS ONLY),” SEPTEMBER 30, 1969

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Total......

1

2

3

3

3

4 19. 182 28. 449

34. 856

48. 639

Footnotes at end of table.

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