whether applications for registration should be denied, if the intent of the proposed amendment is, as we believe, to require due process when denial of registration is being considered and the defect in the registration statement cannot be remedied. We believe, however, that to require the Commission to enter an order granting registration of a transfer agent could create an undue administrative burden for the Commission since there are thousands of transfer agents. Since we assume that the only purpose of this provision is to prevent the registration of a transfer agent by mere inadvertence, we suggest that the Subcommittee consider deleting this requirement at least with respect to transfer agents.

Subsection (f) of proposed Section 17A would provide that a clearing agency, securities depository or transfer agent may withdraw from registration upon such terms and conditions as the Commission may deem necessary in the public interest or for the protection of investors. The Commission may also, by order, cancel or deny the registration of such entities if they are no longer in existence or have ceased to do business in the capacity specified in the registration statement. The Commission supports this provision.

Subsection (g) of proposed Section 17A would give the Commission broad authority to adopt such rules and regulations with respect to the activities of clearing agencies, securities depositories or transfer agents as the Commission finds necessary or appropriate in the public interest or for the protection of investors. We support the need for such rulemaking authority over these entities with regard to their activities in the securities processing area.

Subsection (h) of proposed Section 17A deals with review by the Commission of disciplinary action taken by clearing agencies and depositories against participants and persons associated with a participant, and review of denials of admission. Commission review of such action would be upon application of an aggrieved person filed within 30 days after such action has been taken or upon the Commission's own motion. The Commission would be authorized to order a stay of the implementation of any disciplinary action pending review. This Subsection would give the Commission authority to review action taken against non-broker dealer participants including banks and other financial institutions and their associated persons. We support this provision.

Subsection (i) (1) of proposed Section 17A would give the Commission, after notice and opportunity for hearing, authority to affirm, modify or set aside disciplinary action taken by a clearing agency or depository with respect to a participant or person associated with a participant, and Subsection (i) (1) would authorize the Commission, upon a finding that the sanctions or penalties imposed in any disciplinary proceeding are inappropriate, to cancel, reduce, require the imposition of a different sanction or penalty.

1. It should be noted that Section 8 of H.R. 15303, 92d Cong., 2d Sess. (1972), provided that if the Commission determined in its review that the sanction imposed by a self-regulatory organization was inadequate or inappropriate in view of the nature and seriousness of the violation, it could remand the disciplinary proceeding to the self-regulatory organization with a statement of its position thereon and with appropriate instructions to the self-regulatory organization to reconsider such penalty or sanction and to determine whether some different or additional penalty or sanction should be imposed. After such determination, the Commission could again review the disciplinary action and, with or without taking additional evidence, then determine and impose such penalty or sanction as it deemed appropriate. The Commission could not, however, assess any fine which the self-regulatory organization had not already imposed upon the person disciplined. The Commission believes that the Subcommittee should give consideration to adopting this approach.

2. While proposed Section 17A (i) would give the Commission the authority to review disciplinary proceedings de novo, it is clear that the Commission has the discretion to consider the record before the securities depository or clearing agency. While we have no objection to being granted authority to review a proceeding de novo, we believe that the Commission should have the authority, as a matter of administrative efficiency, to remand cases for reconsideration to the clearing agency or securities depository involved, in appropriate instances. Subsection (j) of proposed Section 17A would provide for review of a denial

5 Since there are a limited number of clearing agencies and securities depositories, the Commission does not believe that the requirement of an order for granting their registrations would be an administrative burden.

of participation in a clearing agency or securities depository and, upon such review, require the Commission either to dismiss the proceeding or, by order, to set aside the action of the clearing agency or securities depository and require it to admit the applicant to participation. Again this review is not limited to broker-dealer participants and would include banks and other financial institutions who may be denied participation in a clearing agency or securities depository. We support this provision.

Subsection (k) (1) of proposed Section 17A would require clearing agencies and depositories to submit rule changes along with a summary statement of the changes, and the basis therefor, to the Commission. In addition, the Commission could require clearing agencies, depositories, and transfer agents to file such information as the Commission may require to keep current their registration statements. No rule change would become effective unless the pro.cedures set forth in this Subsection were followed. Subsection (k) would require all rule changes to be published for comment. A proposed rule change would become effective 60 days after such publication (or 150 days if the Commission institutes public administrative proceedings concerning the proposed rule change) unless the Commission by order disapproves it.

1. In our view, public notice and an opportunity for comment is desirable. We believe, however, that the securities depository or clearing agency, rather than the Commission, should solicit public comments on proposed rule changes so that it may have the benefit of such comments before it acts. We also believe that solicitation of public comments should not be required with regard to all rule changes. This matter should be left to the securities depository, subject to Commission discretion to solicit additional comments. In any event, where a securities depository or clearing agency has obtained comments, the Commission should not be required to duplicate that effort unless, in its discretion, it wishes to do so. Additionally, copies of the comments received by the clearing agency or depository should be sent to the Commission with the filing of the proposed rule change.

2. Although opportunity for postponing proposed rule changes is provided for by this Subsection, there is no explicit provision enabling the Commission, where consistent with the purposes Section 17A or otherwise appropriate in the public interest, to accelerate the time required before rule changes can take effect, although such authority is implicit. Many housekeeping rule changes and amendments, directly or indirectly designed to improve service to investors, should be permitted to take effect with dispatch, and without publication, subject to the Commission's oversight.

3. Finally, as noted previously, this Subsection would make such rule changes effective within 60 days after publication unless the Commission disapproves such changes. Under the Subsection, as drafted, the Commission would not be permitted to extend this period unless it instituted public administrative proceedings concerning such changes. We believe the requirement that public administrative proceedings must be instituted, if the Commission has not completed review within 60 days of publication, is unduly burdensome especially in view of the fact that public comment is required, and it is not likely to significantly aid the administrative decision-making process or the public interest. Subsection (1) of proposed Section 17A would give the Commission direct disciplinary authority over transfer agents and their partners, officers, directors and employees. As we indicated in our introductory remarks regarding Title IV, we believe that, in the case of transfer agents which are banks, such disciplinary authority should rest with the appropriate bank regulators.

Subsection (m) (1) of proposed Section 17A would grant the Commission direct disciplinary power over depositories and clearing agencies. Subsection (m) (2) would grant the Commission direct disciplinary power over participants and persons associated with participants. Subsection (m) (3) would give the Commission authority to remove from office any officer or director of a clearing agency or securities depository who willfully failed to enforce the rules of such entity or has willfully abused his authority.

With regard to Subsection (m) (2), the Commission should be granted direct authority to censure or otherwise impose limitations on a participant. The rather severe sanctions of expulsion or suspension may work an undue hardship on

"For example, housekeeping rules and other minor or technical changes should be excepted from this procedure. However, the Commission should be able to require the securities depository or clearing agency to solicit comments on any change.

20-306-74-pt. 5-3

the participant. The additional sanctions we suggest will give the Commission greater administrative flexibility to fashion appropriate sanctions. Sanctions against persons associated with a participant should be expanded to include

censure.

Regarding Subsection (m) (2), we suggest that the Commission not be given direct authority to discipline a participant or person associated with a participant for violation of a rule of the depository or clearing agency which relates solely to the internal management or procedures as between the depository or clearing agency and its members, where such rules do not affect the public interest, the interest of investors or the efficient processing of securities transactions. Additionally, the Commission should not be required to proceed against any such participant or person associated with a participant under Subsection (m) (2) solely because of violations of any securities depository or clearing agency rule without first notifying the entity of the alleged violation and the Commis-. sion's intention to institute a proceeding based on it, and giving such entity a reasonable time within which to compel compliance with the rule. As noted above, under Subsection (m) (2), the Commission would have disciplinary power over participants and their associated persons. As the Subcommittee is aware, this would include banks, insurance companies, and other financial institutions.

Subsection (n) of proposed Section 17A is intended to give meaning to the Commission's authority under Subsection (m) (1) to suspend or revoke the registration of a clearing agency or depository by giving the Commission authority to apply to any court of competent jurisdiction for the appointment of a trustee to operate or terminate the facility under terms and conditions prescribed by the court. We believe such authority is desirable since it would not necessarily make the sanction of terminating or suspending the registration of such facilities a hardship to participants and investors. We note, however, that such a sanction would probably be imposed on a clearing agency or depository only for the most severe failures on the part of such facility to fulfill its statutory responsibilities.

Subsection (o) of proposed Section 17A is a recordkeeping section which is substantially identical to existing Section 17(a) of the Act. We support this provision.

Subsection (p) (1) of proposed Section 17A would require the Commission to prepare full and detailed reports of all examinations conducted by it of banks that are registered as clearing agencies, depositories or transfer agents and, upon request, to furnish a copy of such report to the appropriate bank regulatory agency as defined in proposed Section 3(a)(26) of the Act (Sec. 402 of H.R. 5050). Subsection (p) (2) would direct the Commission to consult and cooperate with the appropriate bank regulatory agencies in order to facilitate fulfillment of their mutual regulatory responsibilities to the maximum extent practicable. This is the only provision in the legislation which relates to cooperative efforts between the Commission and the banking authorities, since Title IV of H.R. 5050 makes the Commission the sole regulator of clearing agencies, depositories and transfer agents. We believe that consideration should be given to granting the bank regulatory authorities the oversight authority suggested in our earlier remarks. Nevertheless, if Congress believes that the Commission should be the sole regulator, we will, in any event, cooperate with the various bank regulatory authorities to the maximum extent possible. We wish to reemphasize former Chairman Casey's statement that "(W)e are sensitive to the reluctance of banks to become subject to multiple regulation in their transfer functions and of their desire that a depository to which they entrust the securities that they hold as fiduciaries look like a bank, feel like a bank and be regulated like a bank." The Commission will make every effort to accommodate these concerns.

7

Subsection (q) of proposed Section 17A provides that this Section shall not apply to any transfer agent with respect to securities transactions occurring outside the jurisdiction of the United States. We have no comment on this provision.

Subsection (r) of proposed Section 17A would require the Commission to take whatever steps are within its power to bring about the elimination of the`

7 See Statement of William J. Casey, former Chairman of the Securities and Exchange Commission to the Subcommittee on Commerce and Finance of the House Committee on Interstate and Foreign Commerce, on H.R. 14567, and S. 3S76 (August 14, 1972).

stock certificate as a means of settlement among brokers by December 31, 1976. We are in complete agreement with this goal. We are concerned, however, that the rigidity of a fixed timetable may make it difficult to adapt to circumstances not now foreseeable and to weigh the benefits and advantages of eliminating the stock certificate at a fixed point in time against the costs which would have to be incurred to achieve it. However, if Congress fixes a definite timetable, the Commission will undertake to meet it.

SECTION 405

Section 405 of H.R. 5050 would amend Section 24 of the Securities Exchange Act which deals with the confidential treatment of matters filed with the Commission. This provision creates a problem. The proposed Securities Processing Act (H.R. 14567) which we submitted last year, contained a provision on confidential treatment which was designed to deal with possible special problems of confidentiality applicable to clearing agencies, depositories and transfer agents which will need to have special, security measures to protect the valuable property in their custody and will, of course, have to keep these security measures confidential. In H.R. 14826, which was also considered last year, and in Section 405 of H.R. 5050, the provisions concerning confidential treatment contained in H.R. 14567 were transformed into an amendment to Section 24 of the Securities Exchange Act of 1934, which applies to all questions of confidential treatment arising under that Act, particularly registration statements and reports of corporate issuers.

While the provisions of Section 405 of H.R. 5050 are appropriate for the special problems of security measures by clearing agencies, depositories and transfer agents, they are, in our judgment, quite inappropriate for other types of filings by issuers and broker-dealers under the Exchange Act, which are covered by Section 24, for the reasons set forth below. As to the latter type of filings, the existing provisions of Section 24 have worked well, and there seems no need to disturb them in legislation dealing with securities processing. We accordingly suggest that the provisions of Section 405 be made applicable only to registrants under the securities processing title; that is, clearing agencies, depositories and transfer agents, by making that section applicable to these agencies only, and that Section 24 of the Securities Exchange Act be retained in its present form. However, if the Subcommittee wishes to change Section 24 of the Securities Exchange Act, we have the following comments.

Section 405 of H.R. 5050 would amend Section 24 of the Act to provide that persons who file registration statements, reports, and other materials with the Commission pursuant to the Act may make written objection to the Commission to the public disclosure of information contained in those filings. The Commission would be required to grant confidential treatment where it finds: (1) that disclosure is not in the public interest and (2) that disclosure would (A) jeopardize the safety of funds or securities, (B) require the revealing of trade secrets or processes, or (C) impair the value of a contract. Pending the Commission's findings, the information which is the subject of the objection would be treated as confidential but, in the event the Commission failed to make the required findings within thirty days from the date the information was received by it, the confidential treatment would cease and such information would become public.

Section 405 of H.R. 5050 would also amend Section 24 of the Act to provide that nothing in this Section shall prohibit the Commission from disclosing any information in any administrative or judicial proceeding, and would permit the Commission to make available to an appropriate regulatory agency, for the purpose of enabling it to carry out its responsibilities under the Act, any information contained in any registration statement, document, report or other material filed with the Commission pursuant to the Act. We assume that the term "appropriate regulatory agency" is intended to include the various selfregulatory organizations, as well as the Federal Reserve Board, and we suggest that this be made clear. In addition, we suggest that the bill be modified to permit the Commission to make such information available to other government agencies when needed for the performance of their duties. Moreover, Section 405 appears to require the Commission to provide "the duly authorized committees of the Congress" with any information they might request, presumably including information as to which confidential treatment has been granted. The Commission concurs in the Subcommittee's attempt to create standards by which the need for confidential treatment should be measured. We do not

agree, however, that confidential treatment should be obtainable only where a public interest standard and one or more of the remaining three standards set forth in proposed Subsections 24 (a)(1) (A), (B) and (C) have been met. There may well be situations where it would be appropriate in the public interest to grant confidential treatment, but where at least one of the additional criteria set forth in the proposed section cannot be met.

Under existing Section 24 (b), if a person objects to the disclosure of information subject to that Section, the information is treated as confidential unless the Commission determines that disclosure is in the public interest. Under the proposed amendment in H.R. 5050, the Commission must affirmatively grant confidential treatment, upon the basis of specified findings. The exact significance of this distinction is not entirely clear, but it would appear to place a greater burden on the person seeking confidential treatment, as well as to require the Commission, in the interest of fairness, to act affirmatively in each case where confidential treatment is sought. The proposed amendment to Section 24(b) should also be revised to permit persons to withdraw information as to which confidential treatment is unsuccessfully sought, as is presently permitted. Pursuant to proposed Section 24(b), the Commission would be required to make a determination concerning the confidential treatment of particular information within thirty days after the information is filed with it; otherwise, the information would be subject to public disclosure. Since this requirement may be impossible to meet, particularly where the Commission's staff is confronted with numerous contemporaneous objections to public disclosure of what may be diverse information, it is recommended that the time within which the Commission may determine whether to grant confidential treatment be extended to at least ninety days.

In the event that Congress determines that Section 405 of H.R. 5050 or some other provision concerning confidential treatment of information filed with the Commission pursuant to the Act should be adopted, the Commission recommends that the standards adopted be made equally applicable to information filed pursuant to the Securities Act of 1933. It should be noted, however, that our recommendation for conformity is limited to the applicable standards for judging confidential treatment and not to the types of information as to which the standards would apply. Thus, under the Securities Act, confidential treatment is available only for material contracts while under the Securities Exchange Act, confidential treatment can be extended to any information required to be filed with the Commission pursuant to that Act. The Commission believes that the existing distinctions should continue.

Proposed Section 24(d) would prohibit the Commission from withholding information from the "duly authorized committees of the Congress." This provision is extremely broad insofar as it appears to encompass any information available to the Commission whether acquired, for example, by way of a required filing or during the course of a non-public investigation. Moreover, the phrase "duly authorized committees of the Congress" can be construed to mean any committee which has been duly established by either House of the Congress. Section 101 of H.R. 5050, on the other hand, would require information to be transmitted only to the House Committee on Interstate and Foreign Commerce or the Senate Banking, Housing and Urban Affairs Committee. There is no apparent reason for the difference in these two provisions.

8

While the Commission does not object to congressional committees having access to information contained in the Commission's files, it believes, for the reasons set forth in Commissioner Loomis' testimony concerning Section 101 of H.R. 5050, that some accommodation may be necessary in order to preserve the efficiency and integrity of the Commission's law enforcement and other regulatory functions.

SECTION 406

Section 406 of the bill would amend Section 12 of the Act to give the Commission authority to establish the form or format of the stock certificates of certain issuers and it would also require an issuer whose securities are registered on a national securities exchange to consolidate in one person the functions of transfer agent and registrar and otherwise to comply with such rules and regulations as the Commission promulgates as necessary to assure the prompt

8 See Statement of Philip A. Loomis, Jr., Commissioner, Securities and Exchange Commission before the Subcommittee on Title I of H.R. 5050, June 7, 1973, p. 297, this hearing.