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Mr. Bevis. I am very familiar with the First National City Bank figures. I was curious as to whether there was another study.

Mr. PAINTER. These figures come from a source within the First National City Bank.

Mr. Bevis. I saw that study in draft form some several months ago now. As a matter of fact, they attempted to take figures which we evolved in an earlier study, a January study, and attempted to analyze them. The next morning after I received that, I got in touch with the staff man of First National City who had prepared them and pointed out an assumption which had been made which I considered to be erroneous.

It was my understanding that First National City never did make that memorandum final, so it has never been issued, that the executive vice president of First National City who is in charge of the department in which this was originated has written a letter, more or less to that effect, that it is not relevant to the studies that BASIC is making and has made.

I was under the impression when I heard that Mr. Rowen was interested in this, that Mr. Reed had also gotten in touch with him. So far as I know, the study was never issued for outside consumption.

Mr. PAINTER. Part of my question was

Mr. Moss. I think for the record here that we should make clear that Mr. Rowen has indicated that Mr. Reed did not contact him.

Mr. Bevis. He did not---very well.

Mr. PAINTER. Part of my question was whether you had any objection to our submitting your comments to the First National City Bank in order to clarify this situation.

Mr. BEVIS. None whatever. As a matter of fact, if it is a matter of assistance, one of the First National City officers is among the three representing ABA, and he is here today, Mr. Bensler.

Mr. PAINTER. Well, it would be helpful.
Mr. KAESTNER. Mr. Bensler is available, Mr. Chairman.
Mr. Moss. Could you give us the nature of the study?

Mr. BENSLER. I think anything that I would have to say would simply confirm what Mr. Bevis has already said. The study was an interim study done by a member of our operating group to assist them in a broad effort on their part to understand the transfer processes that will evolve over the next decade or so.

The memorandum was used for discussion purposes among the elements of the bank that are involved in securities processing, and was discussed with Mr. Bevis and his committee to determine the implica tions of these numbers versus their numbers and the assumptions upon which both were based.

On the basis of those discussions, the bank determined that the memorandum that we had prepared had assumptions in it or wa based on assumptions that were questionable, at least, and therefore should not be used as a basis for carrying the study further.

Mr. PAINTER. Mr. Chairman, I think that clarifies the record, and with your permission I would like to move forward.

Mr. Moss. Yes.

Mr. PAINTER. Mr. Howland, critics of the New York Stock Ex change Central Certificate System observed that the system was de signed on assumptions which predate the large volume of institutional trading prevalent today. In other words, the Central Certificate System, they say, is better adapted to the system prevailing several years ago when most transactions were on a broker-to-broker basis.

As you and I know, today a large volume of trading is institutional in nature. In view of that change, is the CCS system adapted to this rather different type of market?

Let me put it a little bit differently: In view of the changes which have taken place in the pattern of trading in recent years, in view of these changes, isn't there a need, a very real need, to consider regional depositories to expedite the increased volume of institutional trading?

Mr. HOWLAND. Well, CCS was first conceived, Mr. Painter, back in 1939, believe it or not, by someone by the name of William McChesney Martin, who commissioned in 1938 and early 1939 a study by Haskins & Sells.

Just to summarize, Haskins & Sells recommended in June of 1939 that the depository would be the way to go: (2) it should be held off, however, until trading on the New York Exchange averaged in excess of 2 million shares a day.

My testimony and my summary yesterday indicated this subject again was broached in 1954, and progressed to the point where we now have CCS.

Further, we commissioned Arthur D. Little to do a study in 1969 and 1970. Many of you may recall that they suggested a broker module in the depository and a bank module, and eventually a transfer a gent module.

But we came down the path with BASIC stating in March 1970 that probably the best way to go would be, in view of institutional trading and the players on the team today, that they have a comprehensive depository whereby you could include your major financial institutions, such as your investment companies, your insurance companies, your broker-dealers and your banks. The memorandum of understanding that I thought we had submitted with our testimony outlines the steps, so that really we have never addressed in New York the question of regional depositories. We felt this really, from the Exchange's standpoint, was not within our realm of responsibility.

In 1967, we had conversations with the Midwest about the possibility of setting up a satellite in Chicago. This as prior to my time, but I am aware of those conversations.

In December 1970, I believe, further discussions were held in New York by myself along with a committee appointed by Mike Tobin, president of the Midwest. I think, since we are a part of BASIC, we have addressed ourselves from the New York Stock Exchange's standpoint toward New York. As a member of BASIC, we have not taken a position. In fact, we have encouraged the regional concept. I think the Midwest at Chicago, and probably one on the Pacific Coast and one in New York, would suffice.

So I think that it is a long way around, but we have never indicated that we were against regional depositories.

Mr. PAINTER. Just to clarify that point a little bit further, it was pointed out by Mr. John Cunningham, a director of Arthur Young & Co., on page 10 of a statement presented before Senator Williams

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subcommittee on September 30, 1971, that an examination of the operations of the Central Certificate System shows a very high incidence or ratio of certificate withdrawals to certificate deposits in order to make deliveries to institutions and to individuals.

It was urged that this system would be alleviated by the establishment of regional depositories which would be interconnected with a national depository, so as to permit institutions and regional brokers to submit their instructions for receipt and delivery locally.

Is this correct? And would you then concur in the suggestion, as I believe you do from your previous testimony, that the New York Stock Exchange is in favor of establishing at least three regional depositories, shall we say in Chicago, San Francisco, at least, and possibly more cities?

Mr. HOWLAND. I don't find it inconsistent. I think Mr. Cunningham raised a point on the number of what we call "withdrawals from the depository."

I said in my opening statement that Congress last December amended the Investment Company Act of 1940, the amendment of 1970, to allow investment companies to deposit directly into a national depository, or through their normal relationships with banks.

So I think Congress has already addressed this situation. You are solving the problem. There is a year's cooling off period, so it will be December 14, 1971, before they can start participating, but that is just about 90 days off.

Mr. PAINTER. Mr. Montross, in his statement on pages 11 to 14, expressed concern that decisions regarding a national depository system are New York oriented, he said, because of the composition of the BASIC committee and the proposed board of directors of CSDSperhaps the question I am asking is somewhat rhetorical, because I have a feeling that you are going to disagree with me. The criticism here, Mr. Howland, and I am sure you are aware of it, is that the BASIC proposal, the CCS operation and its planned CSDS operation will be essentially a New York operation having a distinctly New York flavor to it, and therefore, at least it is being urged by some, that we should give serious consideration to an approach which would give more equality of treatment to other parts of the country and place a greater emphasis upon regional depositories. This you might call, I suppose, a concept of integrated pluralism, rather than having all of this, or a significant part of it, centered in New York.

Mr. Moss. I think at this point we will let you have the balance of the day to think through carefully your response to that. I will ask the reporter to be prepared to read it back to us at the beginning of the session tomorrow morning.

That is the first bell in what should be a long succession of bells today, and it summons the members of the committee to the floor of the House.

Gentlemen, I thank you, and we will see you tomorrow morning at 10 o'clock.

(Whereupon, at 12:15 p.m., the subcommittee recessed, to reconvene at 10 a.m., Wednesday, October 20, 1971.)

STUDY OF THE SECURITIES INDUSTRY

WEDNESDAY, OCTOBER 20, 1971

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON COMMERCE AND FINANCE,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C. The subcommittee met at 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.

Gentlemen, I think you can safely plan that the hearings will conclude right around noon. The committee room is scheduled for other use this afternoon and we are going to have early votes on the floor of the House.

Mr. Painter, you had asked a question at the time of our adjournment yesterday which was to be repeated now.

Mr. PAINTER. Yes, sir, Mr. Chairman. I think it would be appropriate to address this question not only to Mr. Howland but also to Mr. Bevis. I will repeat the question as it was handed to me this morning by the reporter.

Mr. Montross in his statement on pages 11 to 14 expressed concern that decisions regarding a national depository system are New York oriented, he said, because of the composition of the BASIC committee and the proposed board of directors of CSDS. Well, perhaps the question I am asking is somewhat rhetorical because I have a feeling that you are going to disagree with me. The criticism here, Mr. Howland,

and Mr. Bevis, and I am sure you are aware of it, is that the BASIC proposal and the CSDS operation might be essentially a New York operation, having a distinctly New York flavor to it. Therefore, at least it is being urged by some that we should give serious consideration to an approach which would give more equality of treatment to other parts of the country and place a greater emphasis upon regional depositories, what you might call, I suppose, a concept of integrated pluralism. I might add that this phrase is mine rather than a phrase which was used in any of the statements.

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 DU PONT, CHAIRMAN OF THE BOARD AND PRESIDENT, SCI-TEK, INCORPORATED

Mr. HOWLAND. Let me start off, Mr. Painter. I think that to say that BASIC is New York oriented might not be entirely correct.

BASIC as Mr. Bevis has indicated is made up of the chairman of three of the 10 clearinghouse banks but in addition to Mr. Bevis, executive director, there is the president of the New York Stock Exchange which represents some 580 firms who had geographical dispersal throughout the United States, the president of the American Stock Exchange with similar dispersion and I think the key is that Mr. Gordon Macklin as president of NASD representing some 5,000 broker-dealers throughout the United States is also a member of BASIC.

So I don't think it is a question of whether it is the New York or the world. I think it is a question that we are building on CCS something that is viable, something that is going and I think one can't help but be impressed with the statistics that were entered into the record yesterday as to what CCS has done but I would like to defer to Mr. Bevis, I think he can be more impartial than I can.

Mr. Bevis. Mr. Chairman, it is true that five of the seven members of BASIC are resident in New York and have their places of business in New York. It is also true that the first problem we tackled was that of a central depository in New York for the simple reason that, as I have explained before, some two-thirds to three-quarters of the securities handling problem of the entire United States is centered in New York and that problem must be licked or the national problem cannot be licked.

However, I think our orientation from early in the game has been nationwide and necessarily so because the objective is to immobilize certificates in depositories and transfer ownership by book entry, and New York deals so much with the rest of the country in securities transactions that it couldn't accomplish its own purpose in its own selfinterest without there being the other side of the book entry capability in other parts of the country.

Having brought the New York depository plan into rather concrete lines as we did through the memorandum of understanding, we are now

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