There isn't any question but that a depository is going to cut down transfer volume of transfer agents, and many of them are New York banks.

We estimated that a New York depository alone would reduce transfer volume as it exists today some 40 percent, and that a national depository would reduce the transfer volume by some two-thirds.

The banks know this. The banks that we are dealing with in New York know this. The banks in New York also know that some of their loans a lot of their volume of handling securities transactions for out-of-State people and so forth-depends upon that physical certificate, and the fact that at the moment it is largely localized in Lower Manhattan.

They know this. I have not had to date a single question raised by any of the 10 banks in New York, at the policy level by officers of banks, any question about not going forward with the depository because it would have this impact on them.

And they are not stupid people, being where they are. and they know what is going to happen. I think the banks in New York, and it is commencing to spread across to bankers in other parts of the country, are convinced that the depository is the prime hope of not having another near chaos such as we had in the past, and even though they are affected and their securities transactions and their activities based on the securities are a small part of their overall operations, nonetheless they are giving it full support.

Mr. McCOLLISTER. Mr. Chairman.

Mr. Moss. Yes, Mr. McCollister.

Mr. MCCOLLISTER. Is it not true that banks have had many of the same problems in their bank office or on their operations floor and that those problems have removed a lot of the profit from the transfer fees? Is it not questioned that these transactions actually are profitable?

Mr. BEVIS. First, it is very true that in their securities cages and in their transfer operations they have had a lot of clerical difficulties, much like brokers. They are automating transfer activities extensively, and that may make them less labor-oriented, but they have had clerical difficulties of magnitude, ves.

As to their net profit from these operations, I have heard it said, and I haven't seen any figures, that the transfer, typical transfer department operation is probably unprofitable in a low level of activity where they must retain experienced standby clerks. It is probably unprofitable at a high level of operation where they must bring in new people and try to train them, work overtime, and so forth, so that there is a middle band where typically the operation may be profitable. Some transfer agents say that they make money consistently in their operations, but I think the more typical one would be the one that I described.

As to profit in handling, processing securities transactions for their customers and for their correspondents out of town, again I have heard that this is not considered a very profitable business, and it is labororiented.

Insofar as lending on securities that have been frozen in place and the broker has to finance them, I suspect that would be profitable.

Mr. MCCOLLISTER. The only point that I wanted to draw out is that the interest at stake here may not have the magnitude that it once did, or that some people think it might have.

Mr. BEVIS. I know many bankers that say that immobilizing the certificate and limiting the processing of it would not be an unmixed blessing, and many of them would welcome it.

Mr. MCCOLLISTER. Thank you.

Mr. Moss. At this time, I think we shall have to wind up the morning session. I have been holding a conference up here in an effort to determine whether we should go on during the afternoon, and, referring to the calendar of business on the floor of the House this afternoon, there are possibly two items of controversy, one, certainly, of considerable controversy, scheduled: The school lunch and breakfast programs for needy children, and I think reference in the press in recent weeks would convince you all of the controversy on that question.

Accordingly, the committee will adjourn until 10 o'clock tomorrow morning.

Mr. BEVIS. Mr. Chairman, should we plan on Wednesday morning, or not?

Mr. Moss. I think so, yes. We will do our best to wind up tomorrow, but looking ahead to tomorrow, we start off with a motion to instruct the conferees on the military procurement authorization on the Mansfield amendment. I can see some rather spirited debate there.

Then we have the international coffee agreement, and I never recall it being adopted in an atmosphere of general agreement.

We will do our best, though. Thank you, gentlemen.

(Whereupon, at 12:25 p.m., the subcommittee recessed, to reconvene at 10 a.m., Tuesday, October 19, 1971.)

STUDY OF THE SECURITIES INDUSTRY

TUESDAY, OCTOBER 19, 1971

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCE AND FINANCE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C. The subcommittee met at 10:10 a.m., pursuant to recess, in room 2123, Rayburn House Office Building, Hon. John E. Moss (chairman) presiding.

Mr. Moss. The subcommittee will be in order.

Mr. Painter?

Mr. PAINTER. Thank you, Mr. Chairman. I have a question for Mr. Sporkin.

STATEMENTS OF STANLEY SPORKIN, ASSOCIATE DIRECTOR, DIVISION OF TRADING AND MARKETS, SECURITIES AND EXCHANGE COMMISSION; HERMAN W. BEVIS, EXECUTIVE DIRECTOR, BANKING AND SECURITIES INDUSTRY COMMITTEE; RICHARD B. HOWLAND, PRESIDENT, STOCK CLEARING CORPORATION, NEW YORK STOCK EXCHANGE, INC.; PHILLIPS M. MONTROSS, PRESIDENT, MIDWEST STOCK EXCHANGE CLEARING CORPORATION; CHRISTOPHER J. DELAHUNTY, PRESIDENT, PACIFIC COAST STOCK EXCHANGE CLEARING CORPORATION; DAVID H. MORGAN, PRESIDENT, NATIONAL CLEARING CORPORATION, NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.; FRANK W. KAESTNER, SENIOR VICE PRESIDENT, MANUFACTURERS HANOVER TRUST COMPANY; JUNIUS W. PEAKE, GENERAL PARTNER, SHIELDS & COMPANY; AND HENRY W. DU PONT, CHAIRMAN OF THE BOARD AND PRESIDENT, SCI-TEK, INCORPORATED

Mr. PAINTER. Mr. Sporkin, yesterday Commissioner Needham invited me to explore with you in greater detail the extent of the Commission's statutory powers in the area of clearing, settlement, and so forth. Both my staff and I consider that this would be helpful in view of the Commissioner's testimony on the point yesterday.

The first question is: Has the NASD authority under the statute to adopt rules with respect to clearance, settlement, and so forth, to establish, for example, uniformity in clearance and settlement?

Mr. SPORKIN. My answer to that would be yes, Mr. Painter. I think that that decision, at least from the Commission's point of view, was

determined when they embarked on this ambitious program of the NCC, and that they have

Mr. Moss. Could we suspend a moment? It is very difficult to hear until the console is working.

Go ahead. Are the mikes alive down there?

Mr. SPORKIN. Yes, sir.

Let me see if I can remember where I was.

Mr. PAINTER. Has the NASD power under the statute with respect to uniformity in clearance, settlement, and so forth? You said the NASD did have authority.

Mr. SPORKIN. They do have authority, and they are exercising that authority with the NCC, they have consulted with the Commission at all stages, and they have shown us their bylaws and their constitution, and all that has been submitted to the Commission and its staff.

Mr. PAINTER. Has the NASD authority to provide for uniformity in clearance and settlement with regard to all stocks, not merely overthe-counter stocks-all stocks? Would you say that this includes listed stocks as well, when they are being traded by NASD members?

Mr. SPORKIN. I didn't mean by my answer to get into the question of exclusivity. My answer should be clear that they have the authority to establish what they are trying to establish, which is the NCC, a national system to clear over-the-counter trades.

Mr. PAINTER. That wasn't my question. My question was whether the NASD has authority to establish complete uniformity in clearance and settlement with regard to any transactions by members of the NASD, whether it is in OTC stocks or in listed stocks. Would the NASD have that authority under the statute?

Mr. SPORKIN. That question, if you are talking now about the exclusivity-in other words, in order to set those rules, or establish those rules, for its entire membership and make them compulsory; we have not reached that question.

In other words, that question has really never been posed to us. What we have been discussing

Mr. PAINTER. I am posing it to you now.

Mr. SPORKIN. All I am saying is, that as an attorney, I would cer tainly like to study that problem.

Mr. PAINTER. In other words, that is not clear?

Mr. SPORKIN. It is not my answer that it is not clear. My answer is that I would need, Professor Painter, to study the question as to whether they have authority. I don't think I would be helping you or anybody else by saying they do or do not if I haven't studied the question.

Mr. Moss. Let's make this agreement, then, that you will take the question under study promptly and supply at a very early date for this record an opinion as to the scope of their authority and whether it encompasses the kinds of power that Mr. Painter has just mentioned in his questions to you.

Mr. SPORKIN. Surely, Mr. Chairman.

Mr. Moss. Without objection, the record will be held at this point to receive the opinion.

Mr. PAINTER. Mr. Chairman, could I add on to that request another question?