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and without admitting or denying the allegations in the order for proceedings, respondents consented to findings that registrant willfully violated the recordkeeping and reporting provisions of the Exchange Act and rules thereunder and that respondents failed reasonably to supervise with a view to preventing such violations, as alleged in the order for proceedings. Respondents further consented to the entry of an order censuring them and prohibiting Hosty from undertaking certain supervisory functions.
After due consideration of the offer of settlement and upon the recommendation of its staff, the Commission determined to accept such offer.
On the basis of the order for proceedings and the offer of settlement, it is found that during the period between about April 1, 1968 and April 2, 1969, when the order for private proceedings herein was issued, registrant willfully violated Section 17 (a) of the Exchange Act and Rule 17a-3 thereunder, in that it failed to accurately make and keep current certain of its books and records, including ledgers reflecting securities failed to receive and failed to deliver; a securities record or ledger; ledger accounts or other records as to each customers; and a record of the computation of aggregate indebtedness and net capital as of the trial balance date in accordance with the net capital rules of the New York Stock Exchange, the American Stock Exchange, or the Midwest Stock Exchange.
Registrant failed to make timely entries in its books and records, to correct errors in its customers' accounts, and to reflect the true state of such accounts. It also failed promptly to deliver securities and funds and otherwise consummate securities transactions on behalf of its customers, as a result of which accounts of the customers and of registrant failed to reflect the true facts. In addition, registrant willfully violated Section 17(a) of the Exchange Act and Rule 17a-5 thereunder, in that it failed to file within the required time a certified report of financial condition containing the required information for the calendar year 1968. Respondents failed reasonably to supervise persons under their supervision with a view to preventing the above violations.
Respondents represent that registrant made efforts to keep its records up to date by hiring new and experienced personnel. They state that as a result of these proceedings and of proceedings by the New York Stock Exchange, registrant has merged with another registered broker-dealer, has ceased transacting any business under its own name, and has transferred all its accounts to the other broker-dealer. Registrant further undertakes to withdraw its registration as a broker-dealer upon the termination of these proceedings.
The offer of settlement provides that respondents may be censured, and that an order may be issued directing that Hosty never take control of or exercise authority over the backroom operations of any broker-dealer without first obtaining the consent of the Commission. Respondents represent that while Hosty became a vice-president of the other broker-dealer he has no control, direction or authority over the operations of that firm's backroom.
In view of the foregoing, it is in the public interest to take the remedial action specified in the offer of settlement.
Accordingly, IT IS ORDERED that respondents be, and they hereby are, censured, and that Thomas E. Hosty, Jr. be, and he hereby is, prohibited from undertaking any supervisory duties with respect to back-office operations of any broker-dealer without prior consent of the Commission.
For the Commission, by the Office of Opinions and Review, pursuant to delegated authority.
ORVAL L. DUBOIS, Secretary.
[Litigation Release No. 4998]
SECURITIES AND EXCHANGE COMMISSION,
John I. Mayer, Administrator of the Chicago Regional Office of the Securities and Exchange Commission, announced that on April 28, 1971 by consent of the defendants, a final judgment of permanent injunction was entered by Judge William E. Steckler, United States District Court for the Southern District of Indiana, Indianapolis Division, against Allied Bond & Share, Inc., a registered broker-dealer, and Hubert Leroy Wettschurack, its president.
The defendants were permanently enjoined from violating the anti-fraud provisions of the Securities Act of 1933 as well as the anti-fraud, net capital and books and record provisions of the Securities Exchange Act of 1934.
For further details, see Litigation Release No. 4987.
Mr. SPORKIN. Mr. Chairman, one point on that. You realize that even though a firm might have the latest in computerization, that that is not the whole answer, because that is almost like having a superhighway feed into a dirt road, because it has got to be all along the way: it has got to be the entire system. So that is just one of the problems.
Mr. Moss. G-I-G-O, garbage in, garbage out.
Mr. KAESTNER. Before we leave the subject of the transfer agent. may I comment?
Mr. Moss. Yes, indeed.
Mr. KAESTNER. I would like to comment on a recommendation appearing on page 19 of Mr. Montross' statement with respect to the registrar function.
We feel very strongly that past history and present-day circumstances would certainly dictate the retention of the registrar, particularly when a company acts as its own transfer agent and maintains its own stockholder records. I don't think we want to make it easy for a company to issue a stock illegally.
A considerable amount of unregistered stock, in the form of investment letter stock, is regularly issued by companies and is outstanding in the hands of the public. It is this type of stock, because of its unregistered status, that it can only be transferred under special circumstances, and it is the responsibility of the registrar to make certain the stock is not transferred without proper documentation.
Aside from these circumstances
Mr. Moss. I wonder if we might briefly suspend until I read the language you are discussing so that all members of the panel are familiar with it.
It is from page 19 of the statement of Mr. Montross, the first ful paragraph:
Insofar as the registrar function is concerned, we recommend its elimination In relation to its value-which we consider more imagined than real-the cos 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 con sumers. Further, it adds a delay element to the flow of securities.
That is the language you are discussing now, is it?
Mr. KAESTNER. Yes, sir.
Mr. Chairman, shall I continue, or shall I read this statement ove again?
Mr. Moss. You can go ahead. I think it is now more in contex Mr. KAESTNER. Aside from the circumstances that I just outline I am sure history will reveal that numerous stock swindles were pe petrated by companies who illegally issued unauthorized stock f their own devious means.
We look upon a registrar as an auditor of the company in ord to insure valid issuance of securities through proper legal document tion. We feel the registrar affords these protections against errors omission which would result in the legal overissuance of stock. T registrar affords added protection against forgery and theft.
The atmosphere of letting up on any security precautions at this time could not in my mind restore investor confidence.
In conclusion, having a registrar is pretty cheap insurance for the extra protection it provides.
Now, I can elaborate, and it will take me about a minute or two, to outline the functions that a registrar performs for the 15 cents he receives for every transfer he records. If you would like me to do that, Mr. Chairman, I would be happy to.
Mr. Moss. It might be, for the record, helpful.
Mr. KAESTNER. All right. The registrar function includes checking the old certificate. He has to check the stop payment file for unregistered and lost stock. He has to make sure that any unregistered certificate for which replacement certificates have been issued is not being transferred.
He records the old certificate number and the amount of shares, and cancels the old certificate. To assure validity of the new certificate, he checks for the authentication of the transfer agent and compares the amount of shares and the figures and the file on each certificate. He records the new certificate number and amount of shares and compares the amount of shares to the old certificate. After doing that, he authenticates the certificate and by so doing he assumes the responsibility and liability for the validity of issue, and he does all this for 15 cents a transfer.
Thank you, Mr. Chairman.
Mr. Moss. Mr. Montross, I think you are entitled to equal time.
In the comments in our testimony, one of what we think are the more significant problems, is that the value of this service is more imagined than real. I recognize Mr. Kaestner's point. Many registrars perform the function in full, perform a valid audit, which is what they are supposed to do.
It is also my impression and understanding that there are many registrars who do not perform this function in full, do not perform a valid audit.
Mr. Bevis and his task force, I believe, conducted a study of the delay element of processing transactions or routing transactions through a registrar, and determined that the time lag was so short as to be insignificant.
If that is true, that would seem to be at variance with what Mr. Kaestner says about the broad-scale auditing function that is performed by the registrar. It would seem inconceivable that they could do so much work in such a short period of time.
I think this speaks directly to the point of whether or not they do in fact perform the function as required. I am not faulting the registrar. I recognize that in many circumstances there is not sufficient time, or a sufficient dedication to getting that job done, recognizing that the transfer agent has gone through essentially the same steps and more steps, particularly the principal transfer agent.
So it simply is a question of whether or not a function which presumably is performed is in fact performed, and if it is not, we can't justify in our minds the retention of the function, particularly considering the cost involved, which may range from 15 cents to 25 cents, I under
stand, which approximates 50 percent in certain cases of the payment to a transfer agent, who goes through considerably more work to complete his function.
So we think the costs are out of line for the services performed, whether those services are real or imagined.
Mr. Moss. Mr. Peake, and then Mr. Bevis.
Mr. PEAKE. I Support Mr. Kaestner in his proposition that the function of the registrar is an essential one and needs to be continued.
I further believe that it is essential that an independent registrar be maintained when the corporation is its own transfer agent, to prevent the types of abuses he has suggested.
Whether or not it is necessary to have two separate banks, one acting as the transfer agent and a separate bank acting as a registrar is essential, on this point I believe personally from our experience that it is not necessary, and the American Stock Exchange, to the best of my knowledge, has a rule which permits the same financial institution to perform both functions, although, of course, to perform them separately within their organization.
Mr. Moss. Mr. Bevis?
Mr. BEVIS. Mr. Chairman, Mr. Montross referred to a study which the BASIC Task Force made on the independent registrar and whether its existence in the independent status sufficiently slowed up securities transactions to warrant a recommendation that the registrar function be forced into the same house as the transfer function. He is correct that we concluded that the time required-for the independent registrar as compared to having that registrar function under the same house did not seem to be sufficiently long to be impeding, materially, the processing of securities through transfer.
We met no one in any capacity who advocated eliminating the double check audit created by-rather, now performed by the registrar. We found in the course of our explorations that the registrar does find some transfers in error and bounces them back.
So I think the question is not eliminating the registrar function, but whether or not it should be in the same house as a transfer agent. Anyone who suggests eliminating the double check of the registrar, I think, is looking for trouble.
Mr. Moss. Mr. Rowen?
Mr. ROWEN. Thank you.
I would like to ask maybe one more question, and then because of the lateness of the hour perhaps we could move on to depositories.
Mr. Peake, I gather you think there would be significant cost savings involved if we could standardize the clearing procedure.
I note that John Cunningham in his statement on September 30 before Senator Williams' subcommittee puts the potential savings in excess of $1 billion a year. I take it that is a fairly good estimate, and that those savings could be passed on to the investor by lowering commissions now charged on securities transactions. Would that be your thought?
Mr. PEAKE. Mr. Rowen, in my statement, I estimated from my best expertise as an operations executive in the industry for a number of years, that the kinds of reduction in terms of percentage to the present clerical processing would run in the order of about 50 percent of the
I have no way of quantifying that on an industry wide basis. Mr. Cunningham was executive vice president of the New York Stock Exchange for a period of time, and it may be that he had, or perhaps Mr. Howland could comment on, industrywide figures. I have no access to them. I am merely exercising my best judgment.
Mr. ROWEN. The thought is that those savings would be passed on to the investor?
Mr. PEAKE. I would certainly think the investor should reap the benefits of any productivity we receive.
Mr. ROWEN. I understand your clearing organization could, as you say, interface with any national system of depository that was established. Was that your idea?
Mr. PEAKE. I think if you designed it flexibly enough, yes. Standardization is the key, and that is one of the things that so far, to my particular likes, has not moved fast enough.
Mr. ROWEN. I have no further questions, Mr. Chairman.
Mr. Moss. Mr. Painter?
Mr. PAINTER. Moving on to depositories and possibly keeping in mind, Mr. Peake, that you have said that standardization is perhaps the key, I would like to ask this question of Mr. Bevis.
Mr. Bevis, on page 8 of your statement, you observed that if all broker-dealers and banks in the country were tied together in a CSDS, their physical certificate movements of issues eligible for deposit would be reduced about 75 percent. CSDS confined to New York City alone, you say, would reduce the certificate flow in New York by about half.
These statistics, as well as those in your appendix B, have been questioned by studies done by the Inter-Institutional Transfer Systems Organization in a separate study of the effect of depository systems on certificate flow.
We have a memorandum from the First National City Bank introduced in the Senate hearings, recently held on problems of the back office, which states:
On a comprehensive depository basis, assuming 100-percent effectiveness, our study revealed a decline in transfer activity of 25 percent based upon 1970 volume. Then it goes on to say:
The above analysis leads us to the inescapable conclusion that the great reduction in certificate movement that was anticipated as a result of implementing a comprehensive securities depository will not be forthcoming.
My question is: Are these figures correct as submitted in the memorandum by the Inter-Institutional Transfer Systems Organization? If not, why not, and do you have any objection to our submitting your answer to this question to the First National City Bank and having its reply to what you say included in the record for this hearing?
Mr. BEVIS. May I make clear first, Mr. Painter, whether the interinstitutional study you refer to is the First National study, or do they have a separate one?
Mr. PAINTER. All we have is a memorandum.
Mr. BEVIS. From the First National City Bank?
Mr. PAINTER. It refers to the study of that organization. Perhaps you are more familiar with that organization than I. This material was introduced in the Senate hearings, and possibly that is the sourcethat certainly is the source, in fact, that we are referring to here. Are you familiar with those figures?