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have to fight with the computer, and I fought with the computer on a number of occasions.

There are cases on the west coast of grand theft of proprietary information from a computer. We had an experience in our own company with the human error. One of our stockholders suddenly was missing her dividends. She was told that she closed out her account some 9 months ago. She said, “How can that be? I have the certificates."

This made the transfer agent-going back to the human error factor-look into the matter more deeply. Somebody had received 200 more shares on the record but neglected to say anything about it in the interim.

Now, going back over the history of evolution of systems, particularly in the corporate trust field, there always has been a time for using parallel systems. You don't give up what you have until you know what you are going to do works. Most of the conversation has been about the industry, but you are dealing with the public, which is entitled to that protection until that day when they can be assured that Thatever they get—and it will not be paperless—is as good as what they have and they can utilize it to the same degree and freedom that they are utilizing their document now.

To give you one illustration-deciding to pledge the stock for collateral-you have it in your hand, Friday night your bank is open, you walk down and say to the bank manager, "Joe, I need a thousand dollars" or "$2,000; here is some stock.” He knows you and you give him the certificate. There is a tradable item right there.

There are other factors. Another primary one, of course, is the relationship of communication with the corporation and its individual shareholders.

I want to touch on one other point, that Mr. Weinberg brought up. The mutual funds have been used as an illustration, and it is true, a number of people don't take the stock certificate. There are two primary reasons they are not actively traded, and they are a quasi-custody arrangement; you keep putting money in and building up your equity, and right now is not a good time to talk about it since their redemptions are exceeding sales. It is not a criterion with the public market.

Can you touch on one thing that Mr. Painter asked me at the beginning! Would that be digressing?

Mr. Moss. No, if it is germane to the question before us, you certainly can touch on it.

Mr. O'CONNOR. You asked me about the speeds of OCR equipment and I wanted to point out—we mentioned 7 seconds and so many a minute—that in relation to the 7 seconds of processing, it would take 2 minutes to punch out a punchcard, which would have to be verified and merged with the other data in the file.

If you are interested, I can show you some literature on optical scanning, which I picked out, to fit any budget and can read up to 90,000 documents an hour.

Mr. PAINTER. I am sure we would like to have that if you care to submit it. Mr. O'CONNOR. I would be glad to. (The literature to be furnished follows:)


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Tor More Information Cir

Rier Service Card No. 401

1 OTICE, October 1970

Mr. PAINTER. Mr. O'Connor, I do have a question which comes to mind from the speech of Mr. Fred Esty, chairman of the board of the United States Banknote Company, which you attach as an exhibit to your statement. On page 6 of that speech, in paragraph 4, second column of the page. Mr. Esty observes that in his viewThe stock certificate which bears the image of the corporation is the physical identification of the individual shareholder with his company. As such, it is also à basis of intercommunication, especially between the small shareholder and his company, SEC Chairman Casey has said that we must be careful not to buy efficiency at the expense of corporation shareholder communications. Also Senator Metcalf of Montana is keenly interested in nominee lists and asserts that knowledge of corporate ownership is basic to law enforcement, particularly as that information, in his views, relates to antitrust laws.

The question I have concerns the broad subject of whether, when we eliminate the stock certificate, we might be, in some sense, lessening or, shall I say, making it more difficult for the corporation to communicate to the shareholder.

Let me put it in two particular ways. First of all, there might develop between the corporation and the shareholder a psychological "gap" which might not otherwise have existed if we had a certificate. I think part of your statement indicates that the certificate is tangible evidence of ownership. It represents the company to the shareholder. In a sense, it identifies him more closely as a shareholder.

The second phase of this is not the psychological one but rather the problem of communication as such. În other words, if we were to establish a system where all of the names were fed into a data bank, we would have to be very careful that the system of communication between the corporate issuer and shareholder is preserved.

For example, I know that Mr. Weinberg, on page 10 of his statement, indicates that under the certificateless system of settlement, the dividend and proxy departments, among others, would be virtually eliminated.

I am trying to raise this question now of the effect of the certificateless society first on the psychological identification of the shareholder with his company and, second, the problem of the certificateless society as it bears on the degree to which the corporate issuer can communicate effectively with the shareholder.

Do you wish to make any remarks on this? Possibly Mr. Weinberg has some remarks to make.

Mr. O'Connor. I think the point is self-evident. The physical certificate ties the stockholder directly with the records to the corporation. The ultimate or so-called utopian certificateless society, when and if ready, has to interlock back to the corporation the beneficial owner because, as it is presently structured, as I see it, we are getting grand tiers of stockholder information. The brokers and institutions will be the primary holders of record and then be responsible to get corporate information and dividends to the beneficial holders. This ties in also to not only the system but the integrity of the system and being able to communicate with the real stockholder.

Mr. Moss. Would you clarify that? You say the primary owners would be institutions rather than having individuals as owners of the shares ?

Mr. O'Connor. Under the depository arrangement, as I see it—and maybe Mr. Noyes has some information on it-in some literature I read of the BASIC committee, the certificates go into the depository for the account of the brokers and various financial institutions and these are held on deposit.

Mr. Moss. You are talking now about a certificateless society based on certificates in depositories, and we have been addressing ourselves to the question of a purely certificateless society.

Mr. O'Connor. I think it covers both really-both immobilization and certificates.

Mr. Moss. I don't think there has been any determination. I think it would be the disposition of the committee to preserve some means of identifying the individual beneficial owners in any system that was developed.

Mr. O'CONNOR. That would be the certificate.

Mr. Moss. Well, not necessarily. I don't know what I have at the present time from my bank. I fill out a slip and I mail it in and sometimes I merely instruct them to do certain things and they do it, and I get periodically a statement. I don't have some of the other documents that I used to receive in connection with banking.

If I recall correctly, I think that there have been some changes in my State in the titling of motor vehicle transactions. Then in connection with certain real estate transactions there has been a tendency to simplify. So I think you can deal with this matter of ownership without having to have an engraved piece of paper saying that you own this. It might be as simple as a printout from the computer confirming that I have, as of a given date, 500 shares of X Corporation.

Mr. O'CONNOR. As was said in the speech, the certificateless society, as we see it, is somewhere downstream and at the utopian end of the development of the system. As far as the testing of motor vehicles and other matter you mention, I would like to point out that because of the high degree of forgeries and other illegal changes to drivers licenses and related documents the motor vehicle divisions of the various States are working toward more secure documents. In the case of New Jersey the drivers licenses are now an engraved document. It is anticipated that their car registrations and owners' titles will become engraved documents in the near future. All States are concerned about the security of these documents.

Mr. Moss. Well, I would much prefer to look for the ultimate rather than the utopian end, because we here in the Congress become increasingly convinced that we are not going to achieve Utopia, and so very few of us who have succeeded in enduring here ever seek Utopia, but we do seek an objective which can be realistically achieved. There is great difference, I think, between utopian concepts and realizable concepts.

So I would prefer, if we can-although if you want to undertake to continue to characterize them as utopian, that is your privilege and I would certainly not direct otherwise—but I would prefer at this point to challenge that concept because it is not before this committee; and, to my knowledge, it is not before any committee of the Congress. We don't have any committee so naive as to seek that objective.


Mr. O'CONNOR. No, I will call it the “ultimate objective," but woven into this ultimate automated system, should be a requirement to retain the certificate until success is achieved. Aside from all of the ingredients of integrity that we need in the system to have the confidence of the people, there should be a tieback to the corporation of their beneficialowners. Corporations who transfer their own stock, and it might be interesting for the staff of the committee to talk with the corporate transfer agents, are vitally interested in that point.

Mr. Moss. I can assure you that no one is going to be overlooked in the course of the study this committee is making; you can be assured of that. We shall never reach a conclusion in the committee without having a record fully supporting it.

You will note perhaps that I have gone sometimes to rather extreme points to develop on this record what the consensus of the panel here is: and that is for the precise purpose of supporting at some point findings to be made by the committee. And we will draw conclusions from those, and we will make recommendations, but they will be very well supported and with a broadly based consensus. Mr. Maller. Mr. MALLER. I would like to again refer back to Fastclear, because this concept does provide instant

on-line verification for collateral for loans

. It maintains the transfer agent and registrarship and provides really, therefore, for better communication with the stockholder and the company in that we do not have different account numbers based upon the firm with which you are doing business, but everyone uses their identification number, their basic account number, and the financial institution numbering system for the brokerage firm or institution precedes that; so that the transfer agent really will now be able to give the company a complete list of the stockholders, every person who holds stock, whether it be through a broker, what is today called broker nominee or bank nominee, so that the corporation will be much better off in its ability to communicate.

It will be able to communicate more promptly in the sense that it does not have to wait between a record date, for it will know on the record date or on any particular date who owns it as of that day, not that there are shares floating around that have not been transferred or processed

The final thing and I think it is very important to be sure that this is in the record I do not know of anyone in the computer field who has Aver installed a system without sufficient dualing or dual runs to know that the new system works as effectively, if not better, than the old system. To do less is to open yourself up to problems that have not even been dreamed of.

Mr. WEINBERG. I would like to comment on the point that the physical stock certificate serves as some image builder for the corporation. We have in front of us the stock certificate of the United States Banknote Company, and you can all see it has on it a picture of a very attractive young lady, which conjures up many images in my mind which have nothing to do with the United States Banknote Company. I think it is wrong to associate those two desirable

The second point, the problem that the piece of paper acts as secondary backup, has been dealt with, but the problem we get is pri

or are in process.

i obiectives.

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