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Second, I also point out to you as another area of concern of the Commission that in the depository system, while we recognize and have all of the benefits, and we have encouraged the industry to move in that direction, we don't know how that improves the flow of information from the corporate issuer of the security and to the shareholder.

I would hope that it is an area that this committee would direct some of its attention to.

Specifically in the distribution of proxy notices, annual reports, and dividends.

Mr. PAINTER. Commissioner Needham, if I understand your position correctly, you consider that it would be advisable, at least for the Securities and Exchange Commission, on its deciding as to what type of uniformity in clearance, settlement, delivery, and transfer we should have, whether or not we can develop a nationwide system, to wait until the Commission makes up its mind regarding whether or not a central national securities market is advisable. Is that a fairly accurate summary?

Mr. NEEDIAM. No, I don't think so, Mr. Painter. What I am saying is that these are problems that are interrelated, and that solutions to both of them are required almost simultaneously. So we should keep that in mind, and as we move toward a solution in these areas to be aware constantly of the interrelationship of the market system and the need for communication within the market system.

I don't suggest that you wait for us. As Mr. Moss knows, studies are studies, and we both have had enough of those, I think, and I would be the last one to advocate another study. I think what the Commission is trying to do, Mr. Painter, is to create a record on its behalf which will be useful to us as well as the committee, but we in no way want this committee to stop the work it is doing.

We would hope we would be moving together on this matter. This matter transcends the question of independence of an agency and the Congress. This matter cries out for solution simply because it has such great national purpose.

Mr. PAINTER. The point I was getting at, Commissioner Needham, is whether or not it would still be possible to explore uniformity in settlement and delivery, and even Federal legislation along those lines, without necessarily assuming a particular kind of marke' structure.

In other words, assuming that these two questions interrelate, can't they still be explored meaningfully, separately, and, shall I say, is it not possible to press for greater uniformity in clearance, settlement, and delivery right now before, necessarily, we have enough information to make up our minds regarding market structure?

Or are the two so interrelated that you can't move on one without moving on the other?

Mr. NEEDHAM. My view is that these matters are interrelated and efforts should be going on simultaneously in both areas at the same time.

One should not view legislation and rulemaking as final in this area in view of the fact that there is so much going on. I don't see any reason, as you suggest, why you shouldn't focus, and we shouldn't focus on creating the system, as long as we recognize that the market struc ture in the future might change, and therefore the system migh change.

Mr. PAINTER. So the uniform system should be flexible enough to accommodate itself to the particular market structure that we come up with ?

Mr. NEEDHAM. Precisely.

Mr. PAINTER. Mr. Howland, it seems to be your opinion that uniformity in the clearing, settlement, and delivery of securities can be achieved by voluntary cooperation in the industry. I wonder if the experience with the CUSIÐ effort can determine whether or not this is so. In other words, is voluntary cooperation enough?

As Mr. Kaestner points out in his statement, the idea for CUSIP originated in 1964. Ỹet today, 7 years later, CƯSIP numbers are not being used by the industry.

Indeed, the recent announcement of BASIC recommends that firms get ready to start using CUSIP numbers. There is no authority to compel CUSIP numbers to be used.

Now, CUSIP is a fairly noncontroversial item. Yet, 7 years have gone by and CUSIP numbers are still not being used to any significant extent.

The question is whether or not Congress can expect the industry to achieve uniformity in clearance, settlement, and delivery, which I feel is more controversial than the CUSIP area. Can the industry be expected to achieve uniformity in these areas where vested interests are very much affected? Can Congress expect uniformity here?

Mr. HOWLAND. I think 7 years might not be the proper figure. They studied CUSIP for several years—I was not in the industry at the time—but I believe the booklet was put out in the last 3 years, maybe.

To clear the record, I think that the Pacific Stock Exchange Clearing Corporation is now using CUSIP as of about July 1 or August 1. The Pacific Coast Stock Exchange implemented CUSÍP.

I know Mr. Peake's firm, as have several other firms on the street, have been geared up to handle CUSIP; and the New York Stock Exchange and the American Stock Exchange and I believe the Midwest Stock Exchange have all promulgated edicts that CUSIP will be mandatory on April 1 of 1972. I know both the American and the New York Stock Exchange Clearing Corporations will be in a position to handle CUSIP on a voluntary basis on January 1, 1972.

I would like to make one other comment, if I might, Mr. Painter, and Chairman Moss. It seems to me that we are, and this may be a manner of semantics, but linking together clearance, settlement, and delivery, all as one little neat package, and I submit that this cannot be done.

I submit that the New York Stock Exchange, and the American Exchange, have gone on the line and said that they are aiming at a locked-in trade.

If you have a locked-in trade, you don't need a clearance system, because clearance is automatic if it is tied in with the depository. I defer to Mr. Morgan, but I believe that under the NASD's VASDAQ system they have committed themselves in 2 years to have a locked-in trade, if I understand it, it would be tied into their conrinnous net system. There is no longer any clearance then. So I think t hat in looking at this overall problem as to whether we need an overall grandfather company to handle this thing, we really ought to break this down and see what is on the drawing board right now.

My great concern is that it took 9 months of hard effort to get SIP legislation through. I hate to say how long it might take to get legislation going here to create a corporation such as Mr. Peake and others have suggested.

What worries me, if this is on the horizon, is how to treat the commitments that this industry now has, for example, from their counterparts in the banking industry? Whether or not, for example, one large New York bank will begin depositing in the area of $5 billion worth of securities into the CCS sometime late this year or early next year.

If this effort is to come to a halt, I think we could do ourselves a disservice. If this comes to halt and we experience trading volume suc! as we experienced in the first quarter of this year, I am not so sure the street can stand up to it.

Mr. PAINTER. Mr. Howland—I have a tendency, I realize, to repeat the question that I already asked, and Commissioner Needham has already drawn this to my attention. The question I asked to begin wit.. was whether voluntary cooperation was going to produce the necessary uniformity, and I gather from your response that you probably were giving an affirmative answer to that question?

Mr. HOWLAND. I think my testimony made entirely clear that the New York Stock Exchange does not feel that Federal legislation is required or necessary.

Mr. PAINTER. Do you feel that Federal legislation would stifie voluntary cooperation, or to put it differently, would a Federal legis lative proposal in any way—I think the expression was “impede efforts now being done by the industry?

Mr. HOWLAND. I think it would impede to the extent that CCS probably would not expand as rapidly as we now have the ability to do. and as spelled out in the joint memorandum of understanding which has been introduced as evidence or as attachments to our testimony.

I think that we have a chart. We have charted a path as to how. within a period of 2 years, we can pretty well immobilize a great share of those certificates that are now causing trouble.

Mr. PAINTER. Why would the introduction of Federal legislation somehow mean that the CCS effort would not expand as rapidly?

Mr. HOWLAND. I don't think you continue spending money in developing sophisticated computer programs and so forth without knowing where you are going.

Mr. PAINTER. In other words, you are worried that the New York Stock Exchange would not eventually be reimbursed?

Mr. IIOWLAND. It is not the New York Stock Exchange, but our member firms who have paid the bill through the guise of the stock exchange. I don't think that is the problem at all. If you are thinking of the $25 million that is uncaptured, that is not the worry.

Mr. PAINTER. What is the worry? If those financing the system would be reimbursed, what is the problem?

Mr. HOWLAND. I think this problem might be directed to some of our banking friends. CCS got started in 1968, and fell flat on its face in February or March of 1969. It has taken us 18 months to get respectable again. I think we have generated the confidence of the banking community whereby they want to go down the path with us on this joint venture. It is a question of initiative.

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As I urentioned in my testimony, Congress very wisely last December amended the Investment Company Act of 1940, which allows investment companies to deposit their securities either directly or through their custodian into the depository. We have the initiative; we could lose it during the period of pending legislation. So I feel that, yes, this thing could come to a halt.

Mr. PAINTER. I would like to turn for a moment to Mr. Kaestner.

Mr. Kaestner, it has been said, I believe in the statement of Mr. John Cunningham before Senator Williams' subcommittee-Mr. John Cunningham introduced a statement on September 30 of this year where, on page 13, he said that there exist today “negative incentives" toward the development of efficient systems of dealing with stock certificates.

It was there pointed out that “these negative incentives have to do with the impact of the certificateless system upon the use and revenues accruing to transfer agent function of banks, as well as the potential reduction in monetary float as a result of the operations of a national depository.”

Now, I would like to add one further thing. Dr. Lee Kendall, president of the Association of Stock Exchange Firms, said much the same thing in his appearance before Senator Williams' subcommittee on September 24 of this year.

Dr. Kendall pointed out that a stock certificate really represents money at interest, and that various organizations, such as a broker or a bank, can gain or lose interest by speeding up or slowing down the clearance, settlement, and delivery process.

Dr. Kendall concluded that, “It may well be that *** the Congress will have to be the one that identifies the public interest in this area and in essence takes these interest dollars away from the groups that have them."

Would you agree with that, Mr. Kaestner, as an accurate statement?

Mr. KAESTNER. I would like to clarify one statement, if I understood it correctly. I don't think the transfer or the registration of stock materially affects the DK problem. I think the DK problem results from the absence of instructions from the principal or the broker at the time.

As far as the revenues that the banks would suffer, or revenue loss, because of the certificateless society, I have doubts that we would object strenuously to that, because of the paperwork problem and the expense involved in the transfer of certificates right now.

We are in a nickel and dime business that we have to try to make ends meet, and we certainly are not making any money transferring certificates.

Now, I don't know if that fully answers your question.

Mr. Bevis. Mr. Painter, I stayed out of most of this discussion, because I had in mind that you said this was clearance, settlement and delivery, a good part of which is intrabrokerage industry and outside BASIC's scope, but we seem to be getting more and more into the depository, as well as your last question about parties at interest. I have been studying that, so if I may, I will comment on your last question.

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 ther are a ffected and their securities transactions and their activities bases? 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?

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

Is 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.

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