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In a comprehensive depository system which is really comprehensive and participated in directly or indirectly by most of the banks and brokers in the United States, I think the safety of the physical certificate will become almost academic because you can put the holdings of securities into such large jumbo certificates that even if they were lost or stolen, nothing could be done with them.

I hare used the illustration that, if the New York depository holds 40 million shares of A.T. & T. under a really effective system there would be no logical reason why that holding could not be represented by five certificates of 8 million shares each.

You could throw one of those certificates out of the window in Wall Street and no one could do anything with it.

Mr. PAINTER. You would be concerned if you found that one of those jumbo certificates was missing, would you not?

Mr. Bevis. Yes, if it was taken to decorate a wall of a hunting lodge or something like that, it would be a matter of some concern.

However, even in a given city, I think that it would be extremely un vise to concentrate even those harmless certificates in one place and I would fully expect a depository to spread them around among the rarious vault facilities that would exist.

Mr. PAINTER. Outside of New York or are you talking about inside of New York! Vault facilities in other cities?

Mr. Bevis. I am talking about inside each city with regard to its depository.

Mr. PAINTER. In a number of different cities?

Mr. Bevis. In a number of different cities wherever there are depositories.

With regard to the recordkeeping, this is a matter of extreme impor. tance. Any depository-CCS does this today—any depository would have to have first backup equipment, for use in case the original equipment goes down. This could be in the same physical location or somewhere else. The depository would also have to take off information from its files periodically, and it might be more than once a day, and send that physically to some other place such as Stone Mountain or materer it is called in New York, so that the records could be reconstricted for all but a very short recent period in case something happered. Any depository, large or small-if New York continues to be as huge as it is now, it should certainly do it—but any other depository wouill be very wise of course to do the same thing.

Mr. PAINTER. That answers my question.

Jr. Chairman, may I turn to the topic of the machine readable certificate?

Mr. DuPont. Mr. Chairman, may I make some remarks to Mr. Painter's statement?

Jr. Painter, you brought up the question of proxy statements. I hare a few observations I think the committee should consider.

You also have the problem of dividends going to the beneficiary, which the central depository would be an interphase rather than coming directly from the company,

In a true certificateless society, you would have all certificates in the depository. Therefore, there would be a necessary accounting proceduire of monthly statements like the bank sends to you for your checking account sent out to all investors.


We have 30 million investors in the United States. This is going to take a very large complex computer setup. They do not come for free.

Who is going to bear the cost of it? The investors are complaining now because of the charges they are paying in brokerage fees. Is the broker going to handle the accounting procedure or is the central depository going to handle the accounting procedures in this case!

Mr. Moss. Mr. Peake?

Mr. PEAKE. In the proposal which I have put forward. I suggest that the members of the service corporation be all broker-dealers and all banks and that they be the only direct members of the depository much as the members of the Federal Reserve Systems are the only ones with accounts with the Federal Reserve Bank.

The relationship between the broker and the individual customer would remain unchanged as would the relationship between the bank and the corporation for whom it acts as transfer agent or any other capacity.

I do not in any way suggest that certificates be eliminated for those people who wish to have them. If we develop that kind of a system, the burden is on the receiver of a certificate for sale, and it is up to the bank or brokerage firm to use the diligence which is presently required. There would be no ability to substitute a certificate, a bad one for a good one, since no "street name" certificate would exist.

I would like to indicate those certificates that I mentioned were counterfeit were in no way negotiated through or by Shields & Company and, so far as I know, none ever has been.

Mr. SPORKIN. Mr. Painter, I wanted to clarify something on your need for Federal legislation in the proxy area.

I invite your attention to section 14 (a) and (b) of the Securities and Exchange Act of 1931, which gives the Commission broad rulemaking power concerning the area that you were discussing.

We have so far deferred to the self-regulatory bodies as to the method of solicitation but if there is any question as to the methods not being appropriate, I think the authority is contained in those two provisions. I can read those into the record.

Mr. PAINTER. No, we have them right here.

Then, with your permission, Mr. Chairman, I will turn to the problem of the machine readable stock certificate.

Mr. Kaestner, your statement indicates that you are in favor of developing a machine readable certificate.

On pages 9 through 13 of Mr. Bevis statement, he sets forth var ious arguments for not having a machine readable certificate.

Additional discussion is contained in appendices C, D, and E to Mr. Bevis' statement, and his arguments are further elaborated in appendix E.

I wondered whether you had any reply to these arguments. Has the American Bankers Association done anv studies which tend to contradict the findings of the various studies which have been done by the BASIC group and its recommendations in this area?

Mr. KIESTNER. Mr. Painter, the American Bankers Association as such has not conducted any experimentations along those lines since the CUSIP committee final report was turned over to the BASIC committee and related areas of the securities industry.

I would like to state what our position is now. It is a rather flexible one.

At the present time we consider the punchcard machine readable stock certificate as a standby or backup for the depository system. However, we realize that a considerable amount of lead time would be necessary if we were to ever reap the benefits of a punchcard certificate and it is for this reason that we consider it extremely important that we monitor the progress and capabilities of the depository system to make sure that they are capable of keeping abreast of the expanded volume and the absorption of certificates quicker than they are generated.

Mr. PAINTER. Do you have any comment on Mr. Howland's remarks regarding the machine readable certificate as set forth on pages 18 to 28 of his statement !

In short, having read Mr. Bevis' statement and Mr. Howland's statement, both of which have considerable commentary along these lines, have the views of the American Bankers Association changed in any way or do you still advocate strongly the consideration of a machine readable certificate?

Jr. KAFSTNER. Mr. Painter, as I stated, I think we are flexible enough to hold this in abeyance since we don't want to detract from the progress that is being made. The more progress that is made in the depository concept, regional or otherwise, will certainly minimize the need for machine readable stock certificate.

We all hope that some day this will be the step toward the elimination completely of stock certificates and for this reason we would rather stand by and keep close watch on just how successful the depository system is and, if it should falter, I think we should be aware of it and have these alternatives at our disposal.

But at the moment I think it would be unwise to go to this expense and adopt this machine readable certificate.

Jr. PAINTER. You would say that this project should be put on the back burner in a sense?

Mr. KAESTNER. I think it should be put on the back burner but I think that the progress of the depository should be closely watched to make such that we don't have to take it off the back burner in a hurry.

Vr. PAINTER. Mr. Peake.

Vr. PEJKE. Jr. Painter, I have been privileged to serve on the securities imprinting and processing task force of the American Bankers Association since 1966, and I worked with them in their studies and reports and believe myself to be reasonably qualified on their findings.

Statistically, several major transfer agents indicate that today up to 60 percent of the pieces of paper issued are registered in the names of individuals or custodians or in some other similar registration which presumes that the certificates will eventually be delivered to them.

Even if at some future date there is a possibility of having some m:hod of bookkeeping entry, there is nothing mutually exclusive Het vreen the development of a machine readable certificate and a depository, and the task force has never stated that they are mutually exclusive.

As a matter of fact, I believe in his testimony, Mr. Bevis indicated at one point in his thinking he felt it was important not to have all of our eggs in one basket. Many years have gone by. There has not been a movement forward in the machine readable certificate area except that it is interesting to note that one of those certificates, that I hope is still up there somewhere, is American Telephone & Telegraph warrants which A.T. & T. believes strongly enough for economic reasons of their own that they have produced. They are using today a machine readable certificate.

The fact that it is machine readable only to them and no other segment of the securities industry means that we are lacking a standard and this has been the thrust of the SIP work. I do believe in the machine readable certificate.

I think we need it today. I think it can be developed rapidly and I think the existence of that certificate put out by A.T. & T. indicates that it will be done if there is motivation to do it. (A letter of clarification of the above statement follows:)


Washington, D.C., November 16, 1971. Hon. JOHN E. Moss, Chairman, Subcommittee on Commerce and Finance, Committee on Interstate and Foreign Commerce, House of Representatives, Washington, D.C.

DEAR CONGRESSMAN Moss: On October 18, 19 and 20 The American Bankers Association, as you know, appeared before the House Subcommittee on Commerce and Finance to discuss the problems of the securities industry and potential solutions. In reading the transcript of the question and answer segment of the hearings we believe there might be some misunderstanding of the exact posture that we have taken on this subject. As a result we are submitting this letter to reemphasize and clarify the position of the Association.

In 1964, through the Committee for Uniform Security Identification Procedures, The American Bankers Association initiated and has since directed a total standards program for securities processing. Its objectives were the development of a common identification system for securities (CUSIP), a standard numbering system for financial institutions involved in the security processing cycle (FINS), and standard man/machine readable stock certificates and related documents. This effort was undertaken in the recognition that giren the proper standards the industry could design new and improved systems to cope with the continually increasing volume of paper. We feel that this program is still of great importance to all segments of the industry and should be completed and implemented as rapidly as possible.

This approach does not suggest that we are opposed to other efforts which will assist in minimizing the flow of paper. Our standards effort is completely compatible with any viable national depository system which may be developed and implemented in the future. It is not only compatible but we believe it to be a necessity if such a depository system is to operate in an effective manner.

Therefore, The American Bankers Association continues to recommend that finalization and implementation of these standards move ahead with the utmost speed. To postpone or shelve this effort because work is being undertaken towards a depository or even a "certificateless society" would be a grave error. Determination as to whether standard man/machine processable documents is : necessity is not "an either/or situation”. Work to achieve both objectives should be undertaken simultaneously.

In 1969 the SIP Task Force of CUSIP released to the securities industry and the New York and American Stock Exchanges a recommendation for a man/ machine processable stock certificate. These exchanges are the only organizations that have established certificate specifications and both endorsed the recommendation in principle. However, no further action has been taken towards its implementation. There has been considerable discussion as to the viability of the recommendation. It has been suggested that subsequent independent tests have shown that the certificate could not be machine processed. Prior to release of the report, however, the proposed certificate was machine processed and the Task Force was fully satisfied with the results. The question appears to be, not whether the document can be read, but rather whether the encoding of the document requires control to ensure subsequent readability. Control is certainly a necessity, and the A.B.A.'s MICR Program is sufficient proof that this can be readily accomplished.

The other basic elements of the CUSIP Standards Program were finalized in July 1970, and the SIP Task Force released to BASIC recommendations for a standard man/machine processable transfer instruction form, broker comparison/confirmation form and the FINS numbering system. No concrete progress has been made to date to implement these standards.

It is hoped that these additional comments and observations will assist the Subcommittee in its deliberations and clarify any misunderstanding of the position of The American Bankers Association. Sincerely yours,


Executive Director. Mr. PAINTER. I notice, Mr. Peake, that on page 10 of Mr. Kaestner's statement, he observes that if depositories are effective in immobilizing less than 50 percent, or possibly even a little bit more than that, of the certificates in circulation, and trading volume doubles over the next several years, we shall still have to process physically as many certificates several years from now as we do today, and we shall still hare the same problems.

In other words, I suppose what he is saying is that we ought at least to think seriously about the machine readable certificates now as a type of insurance against an unexpected volume in securities trading. 3, 4, or 5 years from now.

As I recall, the New York Stock Exchange or maybe it was the Association of Stock Exchange Firms, was remarkably inaccurate in its prediction several years ago as to what the trading volume would be today. Am I correct in that, Mr. Howland?

Jr. HOWLAND. There was a significant change in the economic model in 1968 versus 1970.

Mr. PAINTER. In other words, do you think we could sit here now and predict what the trading volume might very well be in 1976?

Mr. HOWLAND. The track record of most prognosticators in the last Fear or so, whether GNP or stock exchange volume, have been remarkably shortsighted.

Mr. PAINTER. Then, Mr. Peake, wouldn't it be worthwhile to consider pursuing the machine readable certificate concept as a type of insurance, as Mr. Kaestner suggests?

Jr. PEAKE. I would not only agree and endorse that statement, but I would make the observation that the certificate as recommended by the SIP Task Force in July 1969 and subsequently turned over to the BASIC committee, has never been tested adequately to determine whether or not in fact it is machine processable. I would like to quote without attribution from a letter received by me from a major computer vendor, one of those which worked with BASIC in the study of machine readability. A copy of this letter was furnished by me to Mr. Bevis at the time it was received and the last paragraph I think is of interest.

Jr. PAINTER. I hope you will tell me if any of those certificates are not received back from my staff.

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