4. It is essential that input be sufficiently unique to ensure that an item identified cannot be simply a similar security. 5. Although any backlog of lost and stolen securities data is needed to help make the system as accurate and helpful as possible, subscribers to the system will be accepted even if they come into the system only with new data. Fingerprinting of Industry Personnel.-Mr. O'Neill reported that NYSIIS has now doubled its staff and is proçessing 10,000 prints per month as compared with 5,000 per month earlier. It is anticipated that the fingerprint processing will be as close to on-line as possible in the first quarter of 1971. ASEF is handling lobbying for the Mutual Fund Bill, representing ASEF and the Exchanges. Mr. O'Neill commented that a major problem seemed to be the SEC's concern that passage of the bill will result in a tremendous burden of added work for the SEC. A specific proposed plan for handling any administrative and clerical work is being drawn up and will be presented to representatives in Washington, D.C., by Messrs. O'Neill, Calvin, Scribner and Zarb. Mr. Cross suggested that changing the wording of the bill to make it permissive rather than mandatory might be a helpful step. Generally speaking, the bill provides the SEC with the prerogative to exercise oversight of the fingerprinting program if and when it so desires. Through passage of the bill, the SEC will be providing a great service to the financial industry. Mr. O'Neill expressed concern re the number of firms that seemed to be giving polygraph tests in the employment or pre-employment process. He indicated that indiscriminate use of the test could prove harmful to passage of the federal fingerprinting bill. It was suggested that the personnel subcommittee look into this and try to determine how many firms are using the test-and why? Also, it was suggested that a statement on use of the polygraph might well come from the Committee. There was an expressed concern over the absence of Committee members and it was suggested that members indicate whether or not they wanted to continue on the Committee. There is a great deal of work to be done and it can only be accomplished if the subcommittees are active, working groups. The next meeting of the Joint Bank-Securities Industry Committee on Securities Protection will be held on Tuesday, November 17, 1970 at 10 a.m. in the Board Room on the 13th floor, American Stock Exchange. 86 Trinity Place. October 20, 1970-Erratum MARIAN M. RAJEWSKY. Please correct the second paragraph under Fingerprinting of Industry Personnel to read as follows. "ASEF is handling lobbying for the federal fingerprint legislation representing ASEF and the Exchanges. The fingerprinting issue is included as part of the Mutual Fund Bill. Mr. O'Neill commented that a major problem seemed to be the SEC's concern that passage of the bill as is will result in a tremendous burden of added work for the SEC which would then be responsible for handling administration of the federal fingerprinting legislation for this industry. A specific proposed plan. . . EXHIBIT No. 9 NEW YORK STOCK EXCHANGE, INC.- To: Managing Partner or Officer. First, those member firms which have not investigated SVS should do so as one way of lessening the means by which stolen securities can be negotiated. Second, member firms who plan to use SVS should do so promptly in order to provide the broadest data-base possible. During the pilot program, which ends May 16, there will be no charge for entries made in the SVS computer. The securities 98-502 0-73—pt. 1- -3 theft problem can be attacked directly by prompt reporting of any suspicious securities losses and by more frequent inquiries regarding securities receipts. The cost of using the system is relatively small and we urge you to make maximum use of SVS. For more information contact John Bilella, Sci-Tek, Incorporated, 56 Pine Street, New York, New York (212) 269-1700. LEE D. ARNING, Vice President, New York Stock Exchange, Inc. H. VERNON LEE, JR., Vice President and Secretary. EXHIBIT No. 10 M.F. EDUCATIONAL CIRCULAR NO. 328 NEW YORK STOCK EXCHANGE, INC., To: Managing Partners/Officers of Member Organizations On May 4, 1971 the New York City Police, District Attorney and other governmental authorities succeeded in apprehending seven persons who were conspiring to remove certificates from the vault of the Central Certificate Service operated by the Stock Clearing Corporation. In this instance, all of the certificates were non-negotiable, all certificates were recovered, and no loss resulted to the Clearing Corporation or any Clearing member. This experience is another reminder that the safekeeping of securities requires constant vigilance. Senior management, particularly in the operations area, should seek to remain alert to the problem of stolen securities and the possibility of theft within the firm. Several tools are at the disposal of member firms to seek to know their employees. Fingerprinting is now required by law in New York State. Firms that are not fingerprinting all employees are certainly encouraged to use this very useful tool. Many firms have begun using polygraph tests in various ways. Reference of former employment has been a standard employment application question. These references should be checked closely. Comments of the previous employers, or inconsistencies in the record of employment (particularly unaccounted for periods) may alert management to security-risk situations. Currently, there are several efforts being made to help firms safeguard certificates, avoid stolen certificates, and achieve maximum personnel security. Several of these should be called to your attention: Sci-Tek is currently offering a Securities Validation Service to member firms. This service permits firms to quickly check a data-bank to determine if a security received is stolen and to record in a data-bank the relevant information on their own stolen securities. These data will then be communicated to other firms which may receive the certificates. Information about this service can be obtained by contacting Mr. John Bilella, of Sci-Tek, at (212) 962-1270. The Association of Stock Exchange Firms has published a handbook on securities protection, entitled INTERNAL SECURITY HANDBOOK. It suggests practical procedures which may help you in your own securities protection planning. Copies may be obtained from the Publications Department, Association of Stock Exchange Firms, 120 Broadway, New York, N.Y. 10005, at a cost of $25 for members and $50 for non-members. Marsh & McLennan Incorporated has published a pamphlet, entitled SOME SUGGESTIONS FOR REDUCING SECURITIES THEFTS FROM STOCK BROKERAGE FIRMS. This pamphlet also contains recommendations for procedures which can be employed to safeguard securities, check on the background of employees, and other measures. This may be obtained, without cost, from Marsh & McLennan Incorporated, 70 Pine Street, New York, N.Y. 10005, Attention: Mr. V. Stahl. The New York Institute of Finance is currently offering a series of four seminars on securities protection. Speakers at these seminars have included law enforcement officials, computer specialists, and security officers of banks and brokerage firms. This series of four seminars was offered to member firm executives during April and May of this year and, if there is sufficient interest, the program may be offered again in the Fall. If you are interested in such a program, contact the New York Institute of Finance, 37 Wall Street, New York, N.Y. 10005. Their telephone number is (212) 422-9835. We urge all member firms to avail themselves of these opportunities to improve their internal securities protection. ROBERT M. BISHOP, Director. Mr. DUPONT. B. Various news articles and subscriber recovery notification letters. [The documents referred to as exhibit B were marked "Exhibit Nos. 11 through 15" for reference and follow :] EXHIBIT NO. 11 Re: Sci-Tek COMPLIANCE AND LEGAL DIVISION, TO ALL MEMBERS OF THE COMPLIANCE & LEGAL DIVISION I recently had occasion to verify through the Sci-Tek system, the results of which I believe should be called to the attention of the Division. Sci-Tek is a system which maintains a Data Bank of all securities reported as lost, stolen, etc. Subscribing members have a machine on their premises which permits them to input information into the system and also permits them to query the system when a questionable certificate comes into their possession. If the input is positive, the machine will advise the source of the input by firm name and individual, together with the phone number, so that the inputting party may be contacted to determine the reason for the input. We recently subscribed to the system and we were in the process of inputting information. On Wednesday, October 27, 1971, I received a call from a Pittsburgh attorney who advised that a broker client (member of the NYSE) had in his possession three (3) municipal bonds which he felt were questionable due to past due coupons. The attorney had attended the Compliance Seminar the Division held in St. Louis and called to determine what action I would suggest. I recommended that the following morning he call us with the appropriate identification of the certificates (which he did not have when he called) and we would check Sci-Tek. This was done and we received a "hit", identifying one of the certificates as having been input by another member firm. We called that firm and we determined that the securities had been apparently stolen in the mail at the Los Angeles Airport. The F.B.I. was promptly notified, in fact, I had called them the night before to alert them to a possible problem. We were able to give them ample lead time to take appropriate action. Very seldom does the Bureau have this prompt a notice. At this point I do not know what will be the ultimate disposition of this matter. Before writing this memo, to make certain I would not be obstructing the continuing investigation, I checked with the Bureau to make sure they had no objection to a release at this time. The point I would like to make is that the System does work, but can only really be effective if it has the support of as many banks, brokers, etc. as possible. Sci-Tek is prepared to give demonstrations of their system and I am sure that any of us who have already subscribed, would be pleased to assist. Questions regarding Sci-Tek can be directed to: Mr. Charles McGuire Sci-Tek Computer Center, Inc. 56 Pine Street New York, New York 10005 (212) 269-1700 Very truly yours, PHILIP J. HOBLIN, Jr., President. 1 EXHIBIT No. 12 STOCK CLEARING CORPORATION OF PHILADELPHIA, SCC MEMBER BULLETIN NO. 11 Attention: Operations Manager The problem of lost or stolen securities is a matter of utmost concern to our industry. Action that can be taken to reduce exposure in this area has a dual purpose: not only is our own internal control strengthened, but also there is a psychological effect to discourage any would-be passer of stolen securities. Accordingly, we wish to call to your attention Securities Validation System as developed by SCI-TEK Incorporated. This system provides for the building of a computer data base with the details of missing securities. Subscribers who question the validity of a certificate may request a comparison of that certificate with this data base. When there is a "hit", the subscriber is given the information necessary to contact the firm that reported the security as missing. The Securities Validation System is supported by the New York Stock Exchange, the American Stock Exchange and the Joint Bank-Securities Industry Protection Committee. SCC also supports the concept and believes the system is well conceived. We suggest that banks and brokerage firms make their own review to determine if it is in accord with their needs and the mechanics of operation. Further information can be obtained by contacting: Mr. Walter M. Smock, Executive Vice President, Securities Validation Corporation, Wilmington, Delaware. Yours for better service, MURRAY DODGE, Executive Vice President. EXHIBIT No. 13 [From the New York Times, Sept. 14, 1972] STOLEN STOCK IS LEFT AT BANK WHILE MANAGER CHECKS IT OUT TORONTO, Sept. 13.-A cautious bank manager in suburban Toronto is still holding onto $44,000 in United States securities after an effort here to dispose of them. The person who brought the stock from the United States-1,300 shares of RCA-quickly left the bank while the manager checked with the intelligence department of the Toronto Stock Exchange to determine if the stock had been stolen. RCA, however, is not listed on the Toronto exchange. The exchange requested information through the Securities Validation System, a private computer information service company in New York. Back came the answer in seconds that the stock had been stolen from CBWLHayden, Stone, Inc., New York stockbrokers. The exchange declined to identify the bank involved. "The bank is very upset," an exchange spokesman said. "You know Canadian banks don't like to have things like this happen to them." No one here yet knows who stole the stock or why he would attempt to dispose of it at a remote Canadian bank branch. One guess is that whoever took the stock might have imagined that the bank would have difficulty checking its ownership. RCA closed yesterday on the New York Stock Exchange at 34%. EXHIBIT No. 14 BACHE & Co., INC., Mr. W. HENRY DUPONT, New York, N.Y., February 15, 1973. Chairman of the Board, Securities Validation Corporation, DEAR MR. DUPONT: We have been a subscriber to the SVS system for almost a year. This system has given us greater assurance that securities received in our branch system and home office are freely negotiable before we release the proceeds of sale to our customer. Recently we were able to intercept a $50,000 pay-out by an international branch based upon information provided by the SVS system. The usefulness of the system is dependent upon an increase in the data base to encompass all lost or missing securities especially such information contained in the transfer agent records of the major banks and independent agents. Unfortunately, SVS has been unable to increase membership by brokers and banks thereby limiting the effectiveness of the system. I would like further information concerning your efforts to expand the SVS system. Sincerely, EXHIBIT NO. 15 GEORGE R. REIS. THE TORONTO STOCK EXCHANGE, REPORT ON SVS-SECURITY VALIDATION SYSTEM On August 24th, 1972 in Notice to Members No. 929 the members of the Exchange were notified that they could check stock certificates through a New York based computer operation to which the Exchange now belongs. Stolen, lost and missing certificates from across the United States and Canada have been listed with the computer. Since that time nearly $50,000 worth of stolen securities have been recovered in Toronto as a result of this system. Early in September a Toronto bank notified the Exchange Intelligence Section of a number of securities in their possession and asked if it was possible to determine whether or not they had been stolen. Within 60 seconds the computer gave the answer . . . they were stolen from a New York broker's office in August. As a result about $45,000 worth of stock was recovered. What is more important this stock was taken out of circulation and therefore stockbrokers in both the U.S. and Canada were protected from dealing with it. Early this month a member firm notified the Exchange Intelligence Section that they had a U.S. certificate which they wanted to check with the SVS computer. While the representative of the firm waited on the telephone the computer was queried and reported the certificate stolen, again from the office of a New York broker. This check cost the member firm nothing and saved it from becoming involved in an incident which could have resulted in the firm losing a considerable amount of money. Since the Exchange joined the SVS system a number of member firms have taken advantage of the computer's records to check certificates. Of the approximately 10 checks made two have been positive. While a negative reply from the computer is no guarantee that the certificate is not lost, missing or stolen it is better than no check at all. Members are also reminded that the Royal Canadian Mounted Police will also undertake to check their Ottawa based computer to determine if a certificate has been listed there. But again. a negative reply is no guarantee that the stock has not been stolen. Because the Exchange has been in the forefront of Canadian participation in the system and because of its regulatory function it is notified on a confidential basis when the system reports to a Canadian enquirer that a certificate is listed with it. Members who receive certificates which give them cause for concern may check them by calling Miss Carol Narvey at the Exchange-363-6121, local 149. Should these checks become too numerous the member firm will be asked to join the SVS system independently. By order of the Board of Governors. AILSA M. CURRIE, Secretary. Mr. DUPONT. C. An excerpt from the committee working copy of bill H.R. 5050 presented to the House of Representatives of the 93d Congress, 1st session. Mr. Moss introduced the bill to amend the Securities Exchange Act of 1934, and for other purposes. The bill was |