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It may well be that if we could get some funds that we could adequately staff the kind of unit that is necessary here, that this may be helpful in making some of these decisions.
Mr. PAINTER. As you know, an important point which this subcommittee will have to consider is whether Congress should, on its own initiative, adopt legislation which would, in effect, create an entity, an entity possibly separate from the Commission, and charge it with developing and implementing a system of this sort; and certainly the views of the Commission would be helpful to the subcommittee in these respects.
Mr. Moss. At this point, we would like to have the record very clear, on the question asked and only Mr. Sporkin responded, as to whether or not there is any disagreement among the panelists with the basic premise of the question; namely, that the time has now come for the Congress to act and to create an entity to carry forward, develop and implement a system. Does any panelist wish to comment further? Mr. Weinberg.
Mr. WEINBERG. Yes, my firm, Lybrand, Ross Bros. & Montgomery, has given substantial consideration to this question. Our own position has evolved over the last several years that we have been involved with these problems and we feel the time has come for Federal leg. islation for several reasons. One, because this problem bridges the regulatory areas of the banking and securities industry, we believe there is need for Federal legislation to create a new entity, a new unit, which can be responsible for developing and supervising implementation of the kinds of systems that are required. We think that is the most efficient way to do it and the most effective way to do it in a short period of time.
We also believe there is need for Federal legislation along the lines indicated in Professor Steadman's position paper, of which I believe you have a copy, and the nature of this legislation would be to further broaden the areas for systems improvement by removing some of the areas of problem legislation-custodial care for investment companies, transfer requirements, and so on. In both of these areas
the need for a commission to design and direct development of new settlement systems and, secondly, to simplify the security handling process—we think there is need for Federal legislation.
Mr. Moss. Mr. O'Connor.
Mr. O'CONNOR. Mr. Chairman, may I ask a question? I am not an expert on systems.
Mr. Moss. Indeed.
Mr. O'Connor. The Rand report which was issued, I think, last December and brought to light by SEC Chairman Casey in June, as I read it, indicates that the trade completion process, with some changes in the present system, could benefit the securities industry dollarwise and also accelerate the handling of documents, and I hear nothing about the Rand report suddenly. Has it been forgotten?
Mr. Moss. The Rand report is receiving the careful attention of the committee, together with all of the other studies made in recent years. Each is important in that it makes a contribution on the scope of the problem and makes some recommendations for solution. These three volumes constitute the Rand report.
Jr. O'Connor. Yes, I have read those. Mr. Moss. But, of course, the reports, while important, are not as significant as the committee studies and committee hearings, and that is why the Chair at this point wishes to establish that there is no equivocation in the positions of the panelists. That is why I put the question very precisely so that any dissents can be voiced now. It assists us in our committee deliberations and will be very significant when we have to draft findings, reach conclusions, and make recommendations.
Mr. O'CONNOR. Thank you.
Mr. Noyes. We have been suggesting and recommending for some time that the stock certificate is one of the biggest problems of the industry and have recommended that it be eliminated. But I think that as you determine what this new organization might do or what its mission is, that we should perhaps make a differentiation between stock issues which are held by a great many people and which are commonly traded-certainly all of the OTC securities in which there are marketmakers and certificates of the smaller companies which are locally held, locally traded. It may be that it would be unwise to legislate those out of existence. The certificate may be an effective mechanism for keeping the records of those companies. And I think we should keep this in mind as we design a system.
Mr. Moss. I don't think there would be any predisposition to legislate any of those out of existence. We would be very mindful of the welfare of all types of organizations, and we would be very cognizant of regional problems.
I used the term "entity” advisedly rather than attempting to spell out the form. The form, I think, is something that would have to emerge from hearings more clearly targeted on that question and, if it becomes the judgment of the committee as we move along that that kind of hearing would be helpful to us, we will then more precisely target the subject and invite a panel or elicit testimony from experts in the area, getting their views and their advice.
But at this point, it woud be safe to say that, with the exception of the Commission, there is a unanimous consensus among the panelists that it is now time to move but the form of the entity to be created is not agreed upon. Is that correct? There is no dissent.
Then, on the question of the reservation made by Mr. Sporkin, does the Commission now feel that it has adequate authority to create on its own an entity--we will use the term again to undertake this assignment, or would it have to seek additional legislation?
Mr. SPORKIN. Well, I think, Mr. Chairman, it clearly has authority if it wanted to set up an elite group to come up with the positive recommendations, and I think perhaps that might be an approach here.
Mr. Moss. You say, then, it has the authority to order a study of this? Mr. SPORKIN. Yes, but I am talking about the kind of study Mr. einberg is talking about and the kind of study that was mentioned here except to the point of implementation.
Mr. Moss. I thought we agreed yesterday that whatever we did, we shouldn't have just another study but the study should be joined
with the authority to implement. There seemed to be no disagreement on that yesterday, and I am getting indications, affirmative indications, from the panelists at this point.
So on that basis, then, would the Commission differ with the other panelists? You voice the policy of the Commission at this point.
Mr. SPORKIN. The further point was: On the study, I think we clearly have the authority. Even beyond that, Mr. Chairman, it seems to me that certainly each of the self-regulatory entity such as the exchange and NASD would have the authority to determine in what form a corporation's ownership or equity interest must take for it to be traded.
Let me give an example. In other words, at this point now the New York Stock Exchange has certain listing requirements. I think one of them requires that they have a transfer agent within so many blocks of the exchange itself. I think we would probably have the authority to be able to say that anybody that wanted to trade securities or list securities on that exchange would have to be part of a system which would permit bookkeeping entries showing the ownership of securities.
Mr. Moss. When you say "they,” to whom are you referring? The New York Stock Exchange would have the authority, under its delegation from the Commission, to require participation by its members?
Mr. SPORKIN. No, this is not members but this would be required of companies who wanted to list there.
Mr. Moss. All right, companies listing there. Many companies are not listed there.
Mr. SPORKIN. I wanted to go a step beyond that. Clearly, as to those, they would have that authority, and we would therefore have derivative authority since we have oversight functions and we have specific authority under sections 19 and 17 of the 1934 act and that type of thing. When you get beyond that, you get to the NASDAQ area--when I am speaking of New York, I am speaking of all exchanges, and when you get beyond that to over-the-counter area, which clearly the past number of securities there would be NASDAQ-listed securities, ther, too, would have powers over listing requirements.
So that you do take in really the vast majority of your actively traded securities. I dont know of any that would be traded that would not be at least part of the NASDAQ or exchange type of thing. Beyond that, you might really get into the reservation that Mr. Noves is talking about, because these are fairly inactive kinds of trading vehicles.
We also would have authority, pursuant to amendments granted to the Commission, I think in 1961, over the quotations of securities bra quotation bureau such as the pink sheets, the National Quotation Bireau; and there, too, I think we could probably enunciate listing or quotation standards.
Similarly, we have authority under section 12 of the Exchange Ist concerning securities with over 500 shareholders and $1 million in assets.
So I think if you made the kind of analysis that I am making of the top of my head, Mr. Chairman, I think you would find that we would have fairly broad authority here to make that kind of determination.
Mr. Moss. Then we come to the question of which path is perhaps the most appropriate, whether we are using this direct and indirect, this partial delegation and partial full assumption of responsibility on the part of the Commission as an approach to establishing an effective, compatible national system, whether that is more feasible than to seek direct congressional action, where we don't have to be concerned abut the shadings of who is going to do it but where we can create and direct in its entirety that there be action across the board. If there are—as Mr. Weinberg has raised questions of jurisdiction touching upon regulatory bodies other than those encompassed within the Securities Exchange Act itself, the Congess can deal at that time with any of those questions.
Mr. SPORKIN. I don't want to be a salesman here in trying to get more authority: we have more problems now than we can possiby handle; but I think the point is: We do have authority now that crosses into that-for example, on credit regulations, that we have been entrusted with enforcement of those regulations even though they do pertain to banks; for example, regulation U, we have the enforcement power even though the Federal Reserve Board does establish the policy as to what the credit regulations will be.
When you mention indirect powers, I was just trying to work through as to how we get those powers, but they become fairly direct. If you used section 12, for example, it is very direct, because all major corporations have to register with us.
But there are several things here that have to be considered. One is: How about the fracturing or truncating of this type of thing? If you Irok back on other types of legislation where the Congress saw fit to take away from the SEC and give it, for example, to ICC where it came to the railroads.
Mr. Moss. Mr. Sporkin, I see no taking away here. The creating of an instrumentality, whatever its form, to perform a specified function wonld not be taking away. You are not exercising at the Commission this power at this time. I would not want to see us end up with the ditterences-some, I feel, are very fundamental—in the development of this system that I detect in, shall we say, net capital rule applications to the rarious broker-dealer across the Nation.
I feel there that the Commission has not achieved the basic uniformity which, in my judgment, would be required in all fairness and Agrity in dealing with these people. And you are familiar with the studs made by the Investigations Subcommittee of the Interstate and Foreign Commerce Committee which was quite critical of some of those shortcomings.
Mr. SPORKIN. I am familiar with it, Mr. Chairman, and the point is t' t I think that if you saw how we operated in the critical period and
nderstand what we did, I think you would find that the way we operated was equitable, was fair across the board.
I give you one example, we made it quite clear when it came to the *pt capital problems that New York Stock Exchange members were haring at the time, we went to the New York Stock Exchange and we ad:
Lawik ninder our computation, they are out of balance. You have a choice tunte. Either they come into balance or, in effect, you are going to commit your met fund monies.
ITe said further that, “If you do not commit trust fund monevs, we am going to move in," and I think if you examine that record, you will find that, in every instance, the exchange committed its money; in every instance that we did not act, they committed their moneys: and in those instances where they did not commit their moneys, I think it was in 7 days we were in court—the cases were Robinson & Co., First Devonshire, and Charles Plohn & Co.
Mr. Moss. As I recall, the study by the Investigations Subcommittee dealt with many firms which were not members of the New York Exchange.
Mr. SPORKIN. Where we did apply. On capital rule, if you look in every one of the cases, we took action.
Mr. Moss. Well, it is not necessary to divert our discussion from the question central to this issue to discuss the problem of how effectively the Commission operated during that period. I am not attempting to be a critic in the sense of derogating from the activities of the Commission, but we are charged here with the responsibility of seeking greater excellence in the whole operation of the regulatory function, and we will continue to seek that.
But other than the reservation, we are not in disagreement on this point. Mr. Ware.
Mr. WARE. Two questions of the panel, Mr. Chairman. One, I wonder if I am correct in my interpretation of the responses that the new entity might be under an existing agency of the Federal Government, and I will take SEC or Federal Reserve as an example; and, secondly, that there is general agreement that many smaller corporations, or at least those with relatively few numbers of stockholders, might not use this process—I don't want to limit you, but say 500 or 1,000 shareholders—where there is very little activity in trading. Is there any disagreement on that pointMr. Weinberg, you used the term "new entity.”
Mr. WEINBERG. I have no basic disagreement. I think there would be a problem in establishing any new entity in deciding where its home should be, and I think there is general agreement and desire not to contribute to any proliferation of new Government agencies. It may well be this entity ends up being part of or ultimately reporting to an existing agency such as the Federal Reserve Board or SEC.
The concern is that this entity should be established and it should be given the very specific responsibilities we have talked about.
On the second point, as far as the kinds of companies that should be included in the system, again I agree with you that we are not intending to put on any particularly difficult, stringent requirements on small companies that are traded locally.
The point I make is that consideration should not necessarily be the number of shareholders or number of shares, because it is in the overthe-counter market that there are the greatest difficulties in the trading process. It ought to be criteria relating to the scope or breadth of the trading. Any securities that are traded across State lines or within a broad area which would create physical problems of settlement ought to be included in the system. For the most part, this would exclude small companies, but not necessarily. Many small companies made up parts of the over-the-counter settlement problem.
Mr. WARE. Yes, I understand your measure on exempting, shall we say, certain companies would be the volume or frequency of trading.
Mr. WEINBERG. Yes, I think frequency and geographic distribution.