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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,
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, DIVI
SION 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 ves, 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. 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.
Vr. SPORKIx. 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 saving is, that as an attorney, I would certainly 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?
Mr. Moss. Well, in order that we have before you the question precisely as we want it, Mr. Painter will prepare a memorandum to you setting forth all points upon which he desires an opinion.
Mr. Painter. My question, Mr. Chairman, will extend not only to the anthority of the NASD, but also the authority of the Securities and Exchange Commission to compel the NASD to adopt rules if the Commission considers that such rules are necessary in the public interest.
Mr. Moss. All right. That will also be included, and you will prepare it written memorandum setting forth all points. (The material referred to follows:)
SECURITIES AND EXCHANGE COMMISSION,
Washington, D.C., December 15, 1971. Mr. WILLIAM H. PAINTER, Special Counsel, Securities Market Study, Subcommittee on Commerce and
Finance, House of Representatives, Washington, D.C. DEAR MR. PAINTER : This responds to your letter of November 1, 1971 in which you ask for our views as to the existing statutory and regulatory powers of the National Association of Securities Dealers, Inc. (NASD) and the Securities and Exchange Commission (Commission) “with regard to establishing industry-wide standards relating to (1) the clearance, settlement, transfer and delivery of securities, (2) a nation-wide system for depositories to immobilize stock certificates, (3) the creation of a national system expediting all of these matters, possibly resulting in a so-called 'locked-in trade' and, (4) the possible elimination of stock certificates, at least with respect to certain issuers whose securities are fairly extensively traded."
1. Section 15A of the Securities Exchange Act of 1934 (the "Act") provides for registration with the Commission of national securities associations and I establishes standards and requirements for such associations. As you are aware,
the NASD is the only association registered under Section 15A. Under the provisions of that Section, the rules of the NASD must meet comprehensive statutory requirements. Section 15A (b) (8) of the Act requires, among other things, that the rules of the NASD be "designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade . . . and, in general, to protect investors and the public interest and to improve impediments to and perfect the mechanism of a free and open market. ..."
This provision, in our view, gives the NASD broad authority to require, create or operate facilities with regard to clearing and settling, depositories, and lockedin trades and to establish standards governing access to and participation in these facilities by its members and others. This authority extends to all security transactions wherever executed. Any rules governing the operation of such systems which the NASD sought to establish would have to be submitted to the ('ommission for its review under Section 15A (j) of the Act. That Section requires the NASD to submit to the Commission, in accordance with such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors, any changes in or additions to its rules and states that such changes or additions take effect 30 days after filing, or at an earlier date if the Commission so determines, unless the Commission enters an order disapproving the change or addition ; "and the Commission shall enter such an order unless such change or addition appears to the Commission to be consistent with the requirements of subsection (b)" of Section 15A including paragraph 8 discussed in the preceding paragraph.
While the NASD's statutory powers are broad with regard to the activities of its members, the erercise of those powers is subject to a determination by the Commission that the specific means of implementation meet the public interest and other standards of the statute. In making such determination the Commission must consider all relevant factors. We must, for example, consider the nature of the regulatory problems with which the NASD proposals would deal, the existing state of the available technology, the developments that have taken place independently of the NASD to meet any problems, and the resources available within the NASD and elsewhere in the industry to carry out existing and pro