from a nonsubscribing bank. By inquiry and confirmation, the transaction was negated immediately. This bond was the same one that was confirmed by a subscribing bank in the case dated, July 19, 1972. The bank had discontinued the services of SVS between the July 19, 1972, confirmation and the January 3, 1973, recovery.

January 5, 1973: The second of a reported three stolen bonds was confirmed prior to cash payment by a participating municipality. The dollar value of this recovery was $5,000, totaling $10,000 recovered by SVS, of the reported $15,000 worth of stolen bonds.

January 15, 1973: Based on data supplied by a participating municipality, an SVS member established confirmation of a $5,000 bond. January 16, 1973: A subscribing municipal bond broker had occasion, based on internal SVS provided procedures, to inquire and confirm on a $5,000 bond. All related information was supplied by a participating municipality.

January 17, 1973: A subscribing brokerage firm inquired, confirmed and validated that a payout of $146,000 was negated, by stringent procedures adhered to by a branch office of the firm. This item, a 1,000share certificate of common stock, was reported to the data base by a subscribing insurance company.

February 20, 1973: An individual approached a New York downtown branch office of a subscribing SVS brokerage firm, attempting to negotiate approximately $340,000 worth of various securities, bearing year-old-due bills (dividends forthcoming) in addition to tax stamps in the name of different firms. The due bills and tax stamps affixed to the securities, caused the registered representative to query the home office and inquire on the SVS system. All items were confirmed as stolen by the reporting SVS brokerage firm. This recovery was a portion of a $3.4 million messenger hit that occurred in the Wall Street area in April 1972. The entire incident was turned over to the New York stock and bond squad, and thus far, three individuals have been apprehended.

April 20, 1973: Inquiry and confirmation was established on a $5,000 New York City municipal bond from an Illinois bank. The bond had been taken as collateral for a subsequently defaulted loan.

April 23, 1973: A major New Jersey bank subscriber had occasion to inquire on $300,000 worth of corporate bonds being presented for a collateral loan in a branch office. The inquiry indicated, the bonds were listed on the SVS data base. It was learned that the bonds in question were part of a $2 million airline theft which occurred in the summer of 1972. The loan was negated, and the reporting brokerage firms were notified of the occurrence.

April 25, 1973: $1,000 worth of common stock was recovered between two brokerage subscribers of the SVS system. It is believed that this recovery afforded the firm, which originally lost the securities, an opportunity to reclaim the insurance premium, as well as eliminating a payout by the inquiring broker.

April 30, 1973: A major New York City bank inquired and confirmed on $30,000 worth of common stock being presented for a collateral loan. In this case, the transfer agent notified the FBI and other related law enforcement agencies. Results of the case are pending.

I feel these cases to be a significant to demonstrate the effectiveness of the Securities Validation System and the working relationship between SVS and Government and local law enforcement agencies.

In response to the committee's inquiry relative to our direct relationship with the financial community, I will make the following

comments:

A. THE EXCHANGES

First, I would like to emphasize once again the fact that we were endorsed by the New York and American Stock Exchanges, as indicated in the Wall Street Journal, dated July 24, 1970, to provide this service for their respective member firms.

Second, the envisioned support of the exchanges has been far short of expectation. Other than occasional joint memorandums issued, urging their firms to avail themselves of the service, and an occasional attendance of an American Stock Exchange representative at SVS seminars, the burden has been solely ours.

We have maintained SVS operations completely independent of support of either exchange. Interestingly enough, during the month of November 1972, at the request of the American Stock Exchange, a proposal for the sale of the Securities Validation System was presented to both exchanges. Neither exchange has responded, nor has either indicated any further intention to negotiate.

As a point of interest, the Toronto Stock Exchange has subscribed on behalf of their member firms, and has to date, recovered over $50,000 in U.S. securities. Additionally, the Stock Clearing Corp. of Boston has subscribed and other regional exchanges are now seemingly interested.

B. THE INSURANCE CARRIERS

During a critical period of acceptance, we realized that within the files of the major insurance carriers was the necessary information required for this very comprehensive data base structure.

With early participation and support of Chubb & Son's, one of the five major broker-blanket-bond indemnity insurance companies, the SVS data base grew tremendously. The Registered Mail Central Bureau, located in New York City, which represents 18 insurance companies respecting mail losses, has also been proven to be an excellent source of securities information.

From these two primary sources, SVS now contains over 70,000 entries of reported mail losses for the period of 1970 until present. Mail losses are averaging approximately 2,500 certificates a month, from these two sources alone.

C. CORPORATIONS AND TRANSFER AGENTS

The Transfer Agents Association of New York, a group consisting of private corporate transfer agents, presented a major breakthrough for SVS data collection. Most corporations belonging to this organization provide SVS with losses reported to them.

D. BANK NOTE COMPANIES

Presently, there are seven bank note companies providing data. These losses occur when the securities are transferred from the printer to the transfer agent, or transfer agent to registrar. This information is often overlooked in the reporting structure of the financial community, but must be captured to prevent the negotiation of these, considered worthless, securities.

E. THE BANKS

The banks are most reluctant to become involved in the Securities Validation System, primarily the major New York clearing banks. They continue to emphasize the fact that they have access to NCIC information and most importantly, they may jeopardize their holderin-due-course status, that of a bona fide purchaser. This attitude has also been relayed to other banks who have occasion to consider joining the service.

F. THE BROKERS

The brokerage firms subscribing to SVS are in the upper echelon of the member firms. These firms represent a small percentage of the total number, but collectively handle the major portion of dollar volume in securities trades. Guidelines for the effective use of the Securities Validation System have been established by us, for main offices as well as out-of-town branches.

Although proven effective, SVS has not been overwhelmingly received by the brokerage community. The majority of brokerage firms contend that they are: (1) Covered by insurance; (2) known their customers; and (3) will probably subscribe once burned.

To further support my testimony to the committee, I offer exhibits A to D, respectively, and request that they be printed into the transcript of the hearings.

A. Various memorandums from the New York and American Stock Exchanges dating back as far as August 10, 1962, which recognize this problem.

[The documents referred to as exhibit A were marked "Exhibit Nos. 5 through 10" for reference, and follow:]

EXHIBIT No. 5

NEW YORK STOCK EXCHANGE DEPARTMENT OF MEMBER FIRMS,

To: Managing Partners of Member Firms
From: The Department of Member Firms
Subject: Stolen or Missing Securities

New York, N.Y., August 10, 1962.

In view of the recent security thefts from member firms, the Exchange suggests that every member firm review its procedures for safeguarding securities. Each firm should take the following steps immediately upon the discovery of missing securities in any amount:

1. Notify in writing the New York Stock Exchange, Department of Member Firms, Attention: W. E. Jones, Assistant Director.

2. Notify the local office of the Federal Bureau of Investigation. The Bureau has requested that it be notified regardless of the value of the securities.

3. Notify your local district attorney's office or the local police department. 4. Notify the transfer agent and/or agents involved.

5. Notify your indemnity company.

In addition, the Stock Clearing Corporation stands ready, on written request from you, to notify the main offices of every member organization of the Exchange, all clearing house banks and other non-member organizations using the facilities of Stock Clearing Corporation that the securities specifically described are missing. This notification should include both certificate numbers and the name of the registered owner of the securities.

EXHIBIT NO. 6

FRANK J. COYLE, Director.

NEW YORK STOCK EXCHANGE-AMERICAN STOCK EXCHANGE
JOINT INFORMATION CIRCULAR NO. 2

To: Managing Partners/Officers of Members Organizations
Subject: Missing or Stolen Securities Validation System

JULY 31, 1970.

The Boards of Governors of the New York and American Stock Exchanges have endorsed a proposed computerized system aimed at reducing the negotiability of missing or stolen securities.

In endorsing the system the Boards authorized the staffs of the exchanges to assist actively in its introduction and urged member firms to subscribe. The exchanges will also act as liaison between their memberships and Sci-Tek, Inc., a privately owned company which has deveolped and will run the system.

Through the use of this system brokers across the country will be able to enter descriptions of securities offered for sale or as collateral against loans into a central computer which will compare the data against a master file of all securities reported stolen or missing.

Most member organizations will be able to use their existing teletype or telephone facilities to transmit information and to interrogate the central data file. The entire verification process is expected to take minutes and can be done while a customer is still in the office or at least before funds are paid out.

The system was one of several studied jointly by the exchanges and the Joint Bank-Securities Industry Committee on Securities Protection because of increased securities losses.

The master file of missing securities will be compiled and continually updated by the Sci-Tek computer, from information received from subscribers and deletions will be carefully controlled to protect the security of the system.

The system will be offered to prospective subscribers within the next few months. Cost to subscribers will not start until after completion of a 90-day pilot test, which will begin when the system is operational. Members of national securities exchanges, members of the National Association of Securities Dealers, stock clearing corporations of national exchanges and of the NASD, and banks subject to state or federal regulations will be able to subscribe to the system.

After the pilot operation, subscribers will pay a fixed monthly charge of $3.00 and a per-inquiry charge of between 2 and 10 cents, depending on their rate of use.

The exchanges believe this system will be a substantial aid to member organizations in helping carry out their present responsibility under the exchanges' rules, to know their customer. While the system may not totally eliminate the loss or theft of securities, it will substantially increase the risk of negotiating them. It is for this reason that both the New York and American Stock Exchanges are urging members' direct participation with Sci-Tek in the implementation of this system.

Member organizations will be contacted within the next month by Sci-Tek with an explanation of the system and the technical data necessary to subscribe. Inquiries regarding the proposed system should be directed to Mr. Robert J. Finnerty, Project Coordinator, Sci-Tek Computer Center, 1180 Sixth Avenue, New York, New York 10036, (212) 245-3997; Mr. John Bilella, New York Stock Exchange Representative, 4 New York Plaza, New York, New York 10004, (212) 623-6545; or Mr. Thomas F. Concannon, American Stock Exchange Representative, 86 Trinity Place, New York, New York 10006, (212) 938-2527.

MAHLON M. FRANKHAUSER,
Vice President.

JAMES J. O'NEILL,
Assistant Vice President.

EXHIBIT NO. 7

[From the Wall Street Journal, July 24, 1970]

SYSTEM TO BLOCK USE OF STOLEN SECURITIES BACKED BY EXCHANGES

BROKERS WILI. BE ABLE TO CHECK CERTIFICATES WITH COMPUTER IN A MATTER OF MINUTES

New York-Governors of the New York and American stock exchanges endorsed a proposed computerized system designed to thwart transactions involving stolen securities.

The system will enable brokers around the country to feed descriptions of securities offered for sale or as collateral against loans into a central computer. The computer in turn will match the data in a matter of minutes against a continually updated master list of all securities reported stolen or missing. Most brokerage houses would be able to use existing teleprints or telephone facilities to transmit information on the securities to the central computer, the exchanges said.

The system was developed by Sci-Tek Inc., a privately owned company in Wilmington, Del. It will be offered to prospective subscribers within a few months. The system was one of several studied jointly by the exchanges and the joint bank securities industry committee on securities protection. Securities losses increased during the industry's recent paperwork problem.

The exchanges said they will act as liaison between their members and SciTek. They added that other groups, including members of national securities exchanges, members of the National Association of Securities dealers, stock clearing corporations of national exchanges and of the NASD, and banks would be able to subscribe to the system.

EXHIBIT No. 8

MEETING OF THE JOINT BANK-SECURITIES INDUSTRY COMMITTEE ON SECURITIES PROTECTION, 10 A.M., TUESDAY, NOVEMBER 17, 1970-BOARD ROOM-AMEX

Agenda

Subcommittee Reports:

Aspects of EDP and Systems Security

Counterfeiting and Forgery of Securities

Databank for Lost and Stolen Securities Information

Education Program for Industry Personnel and the Public

Fingerprinting of Industry Personnel

International Aspects of Internal Security

Liaison with Insurance Industry

Liaison with Strike Force and Law Enforcement

Personnel Information

Security Industry Protection Rules

New Business:

Tuesday, October 20, 1970, 10 a.m.,-Room 632, New York Stock Exchange Present: Messrs. Cross, Bilella, Buckley, Gulick, Healy, Keihner, O'Neill, Thompkins and Traynor; Miss Rajewsky

Absent: Messrs. Frankhauser, Golden, Grimes, Hill, Hoblin, Johansen, Kelly, Lindberg, Niemiec, Owens, Quirke, Spies, Weinberg and Zarb

Mr. Cross called the meeting to order and asked for a progress report on the Sci-Tek project.

Mr. Bilella indicated that there were some problems in getting out the brochure and supporting material prior to the October 28 seminar. Following discussion it was agreed that distribution of the material on Friday, October 23 was essential to success of the seminar and that this deadline would need to be met. Mr. Bilella called the attention of the Committee to several problems.

1. Examination of the SCC missing securities file has revealed some problems of incomplete or inaccurate information, thus making direct use of this file as in-put impossible.

2. To date, several firms have agreed to participate in the pilot project. These include Merrill Lynch, CBWL-Hayden, Stone and Abraham & Co.

3. There needs to be further study of the feasibility of working with transfer agents as a source of input. Mr. Cross volunteered to set up a meeting for further discussion of this with transfer people.