Should the non-New York financial centers strongly and persistently seek partnership roles in CSDS and BASIC to insure that policies, systems, and operations will respond to the needs of the entire country?

It is Midwest's conclusion that the third option is clearly preferable from the standpoint of the industry and the public investor. It avoids duplicate investment of money and potential inefficiencies in inter-depository interface; reduces the risk of building a depository system which will not be responsive to the needs of all financial centers; and increases the possibility that depository development, as well as subsequent developments, will more effectively serve the interests of the public and the industry at less cost.

Midwest recommended approach

To satisfy the industry's need for a national depository system which will appropriately serve the entire industry, we recommend the following approach. Concurrent with the expansion of CCS to include the midwest and west coast financial centers, a depository organization should be established to oversee and coordinate the development of a national system within which the east coast, midwest, and west coast regional depositories will be integral and interfaced parts.

The depository organization should be controlled initially by the three major financial centers (i.e., Chicago. New York, and San Francisco-Los Angeles) and the National Association of Securities Dealers (as the "national" representative). As development and implementation progresses, participation should be opened to additional financial centers.

The national depository system, as well as the regional systems, should be concerned with maintaining security account balances for participants in the systems. They should not be concerned with the security clearance function in which money and securities are moved in settlement of trades, except in their capability to interface with the clearance system.

The national depository system should be viewed as a "super-bookkeeper" which would maintain the ledger accounts for security holdings of its members, which would be the regional depositories. The regional depositories would maintain the ledger accounts for security holdings of their members, which would for the most part be brokers, dealers, banks and other institutions.

The national and regional depository systems should not be involved in the disbursement of corporate-issuer dividends, and distribution of notices or proxy material. The role of the depository should be one of providing the corporate-issuer or its agent with the names of the depository members who have holdings in that issue. Disbursements and distributions would thus be made directly to the depository members. Ultimately, through improved mechanization and control, it would be possible-although not necessarily desirable maintaining security account balances for participants in the systems. They should not be concerned with the security clearance function in which money and securities are moved in settlement of trades, except in their capability to interface with the clearance system.

The national depository system should be viewed as a "super-bookkeeper" which would maintain the ledger accounts for security holdings of its members. which would be the regional depositories. The regional depositories would maintain the ledger accounts for security holdings of their members, which would for the most part be brokers, dealers, banks and other institutions.

The national and regional depository systems should not be involved in the disbursement of corporate-issuer dividends, and distribution of notices or proxy material. The role of the depository should be one of providing the corporate-issuer or its agent with the names of the depository members who have holdings in that issue. Disbursements and distributions would thus be made directly to the depository members. Ultimately, through improved mechanization and control, it would be possible-although not necessarily desirable--for depository members to provide the corporate-issuer or its agent with the names of the ultimate shareowner for which the member acts as nominee.

The national depository and regional depository systems should be so designed as to lend themselves readily to conversion to a "certificateless" system by 1975, if such a system is found to be a logical next step toward greater efficiency, service, and protection.

We believe our approach to establishment of a national depository organization will bring to bear on soluton of the problem the knowledge and talents of many people in many locations, and will mitigate or preclude the possibility of dominance by an industry segment or a single financial center.

While we applaud the recent moves by N.Y.S.E. to open CCS membership to organizations located outside New York, we are nevertheless concerned that CSDS in its development will be essentially an extension of the present condition in which the rest of the country faces growing dominance by, and flow of activity to, New York. It is for that reason that we urge development of a national system with active participation in policy, design, and operational matters of the major financial centers of the country.

TRANSFER AND REGISTRATION

The transfer and registration process continues to be a problem in terms of the time required to effect a transfer. For example, our records indicate that a "simple" transfer will generally take four or more days to complete. In defense of the transfer agents it should be said that the great increase in corporate issuers and shareowners, the increased trading "velocity," the impediments to rapid processing imposed by corporate issuers, and the increasing problem of securing necessary legal documentation, all have combined to place a large workload on the transfer agents. This workload, in turn, results in slower movement of securities.

The mechanics of transfer, particularly as they relate to the physical certificate, do not lend themselves readily to production line, high volume processing. Yet, many transfer agents have invested considerable sums of money to automate or otherwise improve the mechanics of transfer processing. This has been done despite the fact that the transfer function-particularly for a co-agent--is generally not a profit-making endeavor. In our opinion, one of the key solutions to the transfer "problem" lies in the near-total elimination or immobilization of the certificate. Although this step would not eliminate paperwork, it would remove at least one type of "paper" which is expensive, inefficient, and archaic.

While we are cognizant of the problems facing transfer agents, we do not suggest that performance improvement cannot be realized. We regard as a significant problem the extreme concentration of transfer agent activity in New York City. This condition has, of course, been an inevitable consequence of the N.Y.S.E. rule requiring its listed companies to have a transfer agent office in downtown Manhattan. With the enactment of N.Y.S.E. Rule 496, which allows the appointment of a single transfer agent based outside Manhattan, a way has been provided to reduce the transfer workload in New York City. An unfortunate requirement in the Rule establishes a forty-eight-hour deadline for completion of the delivery, transfer, registration, and redelivery process, a deadline which even the downtown Manhattan transfer agents generally do not meet.

Nevertheless, Rule 496 is a step in the right direction. But a more liberal and increased participation by transfer agents in other areas of the country is needed. As a national clearing system and a national depository system move toward realization there will be an increased need for agents in all major financial centers to process transfers of all issues moving through those systems.

Ultimately it may be desirable to have regional depositories appointed transfer agents to facilitate certificate transfer and ease the transition to a certificateless system. We do not present this alternative as a formal recommendation because we recognize a host of considerations needing resolution, not the least of which is the possibility of excessive transfer workload for the depository.

Insofar as the registrar function is concerned, we recommend its elimination. In relation to its value-which we consider more imagined than real-the cost of the function is excessive. This cost is borne directly by the corporate issuer, but is inevitably borne indirectly by broker-dealers, public investors, and consumers. Further, it adds a delay element to the flow of securities.

MACHINE-READABLE CERTIFICATE

There has been much study of the feasibility and practicality of developing a machine-readable certificate. While the Midwest Stock Exchange has not conducted an independent study of that subject, it has concluded that such a development, with its concomitant cost of implementation, cannot be justified.

The cost of the development and implementation must ultimately be borne by the public investor and the non-investing consumer, and the benefits, if any, to those people will not provide a reasonable "return on investment."

The need for a machine-readable certificate decreases as the number of certificate in depositories (and safekeeping) increases. The greater usage of a Continuous Net Settlement clearing system and a national depository system will materially reduce the movement of securities, and thereby reduce the value of machine-readable certificates and related processing equipment. The machine-readable certificate does not provide a solution to the problems of record-keeping, trading velocity, and certificate flow. Rather, it is an attempt to treat a symptom by speeding a few less significant steps in the securities processing function. Any significant financial investment should be directed to implementation of national clearing and depository networks which are directed at solution of basic problems.

FEDERAL GOVERNMENT INVOLVEMENT

As mentioned earlier in this testimony we are hopeful the investigation by this Subcommittee will result in an increased interest and effort by the securities industry in working on a national basis to develop solutions to our problems. While we do not take the position that the Congress and Administration should leave us alone to solve our problems, we respectfully suggest that the industry must assume primary responsibility for resolving those problems which are within its capability to resolve.

A specific area in which we believe the Congress could materially aid the industry and the public is in the solution of the state transfer tax problem. The state transfer tax inhibits the development of efficient national clearance and depository systems and therefore acts as a restraint and burden on interstate commerce. As the New York stock transfer tax law now stands, transactions on the Midwest Stock Exchange or in other non-New York markets would become subject to the New York stock transfer tax if "delivery" were to be affected by means of a bookkeeping entry in New York or by the movement of securities in or out of a New York depository or clearing house.

Quite obviously, brokers and dealers and their customers should not bear the burden of a state tax that will be imposed only as a result of the interfacing of non-New York systems with CCS, CSDS, or a New York-based clearing house, or with a national system located in part of New York. Nor should the industry be burdened with the effort to obtain from the New York legislature a specific exemption for each type of interfacing which may be developed in the future, an effort which will be far too costly in terms of lost time.

We therefore believe it appropriate for the Congress to enact Federal legislation which will exempt from state transfer tax transactions which occur outside that state, even if such transactions result in a movement of securities to or from a depository or clearing house located within that state, or result in "delivery" through bookkeeping entries in a system based in that state.

Mr. Chairman and members of the Subcommittee, we appreciate the opportunity to appear before you and present our views on the securities industry's needs and problems and possible solutions.

Mr. Moss. We will now hear from Christopher J. Delahunty, president of the Pacific Coast Stock Exchange Clearing Corporation. STATEMENT OF CHRISTOPHER J. DELAHUNTY, PRESIDENT, PACIFIC COAST STOCK EXCHANGE CLEARING CORPORATION

Mr. DELAHUNTY. Thank you, Mr. Chairman. I am Christopher J. Delahunty, president of the Pacific Coast Stock Exchange Clearing Corporation.

My remarks are a very brief summary of the testimony I previously presented. I address myself to the questions as raised.

With respect to depositories, the Pacific Coast Stock Exchange favors development of regional depositories. We feel this is the most expeditious and efficient method of effecting clearance, settlement, and transfer of securities transactions when used as an adjunct to existing clearing facilities. Consequently, we feel the development of deposi

tories should be accomplished as an adjunct to the clearing facilities that presently exist.

We feel that the depository system is the best method to immobilize. the vast quantities of stock certificates immediately and account for their transfer of ownership by bookkeeping entry.

We favor the development of a series of interlocking regional depositories rather than a central depository for the following reasons: (1) It recognizes the regional focus of much of the financial activity of the country; (2) it utilizes the expertise of industry specialists in all geographic areas; (3) it avoids the possibility of concentration of securities activities in a central area thereby exposing its operation to a greater degree of malfunction by reason of limited labor pools, labor disputes, et cetera; (4) we feel that interregional depository membership reduces transcontinental movement of securities; and (5) it is more acceptable to banks and other institutions whose deposit of collateral loan securities and securities held under fiduciary arrangements are essential to efficient operations of a depository; (6) it inherently provides against transfer taxes being imposed based on location of depositories, thus discriminating against nonresidents of the State in which the facility is resident. "Development of machine-readable certificates and accompanying documents." We feel the development of such documents at this time is inopportune, simply because we feel the major resources of the industry should be devoted to the development of depositories. Diverting to a machine-readable certificate and accompanying documents would involve unnecessary expense, for the securities industry particularly, since documentation required in a depository environment will be essentially different from those presently required. The cost of the change is unwarranted; since it does not deal directly with the major problem in the industry, which is the elimination and immobilization of stock certificates.

One area of standardization is necessary, and that is the adoption of universally accepted identification systems for securities. And we feel that legislation is necessary to make it mandatory if its adoption isn't universal within a short period of time, particularly since the development of depositories and interregional clearance systems is dependent on a universally accepted identification system for

securities.

"Solutions to problems of clearance, settlement, and delivery of certificates." We feel the existing clearance facilities associated with the exchanges and the NASD should be interconnected, each one having an account with each of the others. Then the interregional transactions would be settled through a series of omnibus accounts between these facilities. As each regional center develops a depository, the communications link could be maintained by a depository having an account with each of the other depositories.

We feel that this joint system of clearance and settlement, which is nothing more than a linkup of the existing facilities and its expansion under an accepted interarea interface is more acceptable nationally for the following reasons:

(1) Banks, brokers, and other regional investors whose activity has to be entered for comparison, will be more acceptable to facilities which are resident in their particular regions.

(2) It uses the existing facilities and expertise to the maximum. (3) The development is more timely.

(4) It recognizes time zone differences, local laws, and banking practices which have to be recognized in the development of such systems. (5) It maximizes opportunity for innovation and creative development, and it avoids the problem of stagnation faced by a vast national system.

(6) It provides against one geographic area becoming a monopoly in clearance and settlement of securities and related services, which also may tend toward monopoly in trading.

(7) It prevents the imposition of State taxes which discriminate against certain citizens by reason of geographic location of clearing facilities.

(8) It should exclude dual competing systems regionally.

(9) And it provides a nucleus for the locked-in trade concept and the development of a central market by developing a national communications and service network for clearance, settlement, and transfer of securities transactions.

Thank you very much, Mr. Chairman.

Mr. Moss. Thank you.

(The prepared statement follows:)

STATEMENT OF C. J. DELAHUNTY, PRESIDENT, PACIFIC COAST STOCK EXCHANGE

CLEARING CORPORATION

Mr. Chairman, gentlemen. Thank you for the invitation to appear before your Committee. The Pacific Coast Stock Exchange Clearing Corporation (PCSE CC) is a subsidiary of the Pacific Coast Stock Exchange (PCSE), Los Angeles and San Francisco, PCSE CC is engaged in clearance, settlement and transfer of securities transactions generated on the floor of the Pacific Coast Stock Exchange, as well as the clearance and settlement of securities transactions executed in over-the-counter markets and on other exchanges between members, or members and non-member firms. Membership in the Clearing Corporation includes four major banks in California, as well as some 25 major over-the-counter brokerdealers which are non-exchange members. Our facility performs complete accounting and cashiering services for the 46 specialized posts, as well as some small broker-dealers on the Pacific Coast Stock Exchange in San Francisco and Los Angeles. It provides its members with a security collection service for securities shipped draft attached between San Francisco, Los Angeles, and New York through a satellite office in Jersey City, New Jersey. PCS CC operates a securities depository in San Francisco and Los Angeles, and has recently developed securities processing capability with the Boston, Midwest, New York and Philadelphia Stock Clearing Corporations. It operates jointly with National Clearing Corporation, New York, a clearance and settlement facility for over-the-counter securities transactions between 16 NCC members and PCSE CC member firms, Development of Depositories

The Pacific Coast Stock Exchange favors the development of regional deposi tories in strategic financial centers of the United States as the best method which is presently feasible to facilitate the clearance and settlement of securities transactions. After reviewing the recommendations of the North American Rockwell Report, the Lybrand, Ross Bros. Montgomery Report, the Arthur D. Little Report, the BASIC Report and the Rand Report on the problems of the industry, we concluded that the depository concept offered the best solution by immobilizing stock certificates. This conclusion is confirmed by the success of Central Certificate Service in New York which manages approximately a billion shares with a value of approximately $40 billion. After only one month of full operation PCSE CC's Securities Depository houses approximately 750,000 shares valued at approximately $150 million.

PCSE CC's Depository incorporates a number of CC's features in its design. Additionally, we have incorporated a number of unique features in our Depository as follows: