dealer is restricted to the sale of variable contracts (including variable life insurance) or redeemable securities of registered investment companies, similar to the exemption provided in Section 402 with respect to clearing agencies and depositories. The exemption would not constitute a full exemption for such brokerdealers from proposed paragraph (6) of Section 15 (c) of the 1934 Act, but merely an exemption from the provision with respect to the regulation of such brokerdealers in their processing of variable contracts and certain investment company securities. In any event, we urge the Subcommittee to include in its Report on the bill that the additional regulatory authority granted the SEC under Section 403 is: not intended to nullify the exemptions granted broker-dealers that limit their transactions to variable annuities and other specified securities, or to precludefurther exemptions for such broker-dealers under this provision. 2. Definition of terms-Section 402 Generally, Section 402 of Title IV contains express exclusions from the definitions of "clearing agency", "securities depository" and "transfer agent" for those life companies that may technically fall within the definitions solely by reason of their administering variable annuities. The exclusory provisions raise two problems. First, we believe that Section 402 should be amended so that the exclusory language encompasses insurance companies processing variable life contracts.. Our position is based on the fact that the rationale for excluding life companies, in connection with the processing of variable annuities, from the terms of Section 402 is equally relevant to variable life insurance. Transactions in variable life contracts will not be effected on national securities exchanges or in the over-thecounter markets. Rather, such contracts will be exclusively between the life company (or its affiliated broker-dealer) and the contractholder. The contracts, based on the longevity of a particular individual, will not possess the character-istics of negotiability and fungibility necessary for trading in a public, secondary market, although in certain cases the contracts may be assignable. As the SEC indicated, in its testimony before this Subcommittee, the legislation is not intended to reach securities such as "annuity contracts issued by insurance companies" which do not "get into the securities processing area, although through a series of definitions" they may be encompassed in the bill.13 Therefore, we recommend (see Attachment B) that the exclusion from the terms "clearing agency", "securities depository", and "transfer agent" be expanded to encompass persons who may fall within the scope of the definitions by reason of functions commonly performed by them in connection with "variable contracts or policies issued by insurance companies". Second, while the exclusory language of Section 402 would provide relief for many life companies, it does not clearly encompass a subsidiary of a life com-pany performing the processing functions with respect to variable contracts. We recommend (see Attachment B) that the exclusory language in paragraph (22) (D) for insurance companies be simliar to that contained in paragraph (25) with respect to the definition of "transfer agent". Thus, the exclusion would apply to "any person" who performs the functions of a clearing agency or depository with respect to variable contracts issued by insurance companies. In this man-ner, subsidiary companies could qualify under the exclusion. 3. Participation of life companies in the clearing agency or securities depository— Section 404 Life companies purchased and sold approximately $8 billion of common stock in 1971. Therefore, it is anticipated that such companies will be major participants: in clearing agencies or depositories established for the purpose of facilitating securities transactions. A number of major life companies already have under con-sideration the formation of a regional depository. Section 404 in effect would require-in Section 17A (d) (2) under the 1934 Act-that the rules of clearing agencies or securities depositories provide that registered investment companies and banks, among others. are eligible to become participants in such entities. Furthermore, paragraph (3) of Section 17A (d) 19 See testimony of Mr. Pickard of the SEC staff, Transcript of Hearing on Clearance. and Settlement of Securities Transactions, August 14, 1972, before this Subcommittee, at 36. requires that shareholders and "participants" in the clearing agency or securities depository be fairly represented in such entities with the right to participate in the selection of officers and directors and “in all other phases of administration of its affairs". Since life companies are major financial intermediaries and potentially a significant factor in the development of regional depositories, we recommend (see Attachment C) that the Subcommittee specify the eligibility of insurance companies to become participants in securities depositories or clearing agencies in the same manner that banks and registered investment companies are specified in Section 17A (d) (2). We believe that the inclusion of insurance companies is particularly important in view of the privileges that are afforded "shareholders" and "participants" in the depository under Section 17A (d) (3). 4. The "form or format" of the variable annuity contract-Section 406 It is our understanding that Section 406 of Title IV-adding, among other things, a new subsection (j) to Section 12 of the 1934 Act-is principally concerned with the regulation of stock certificates. Section 406 appears to give the SEC authority to regulate the form or format of variable annuity contracts issued by life insurance companies and their separate accounts registered under the Investment Company Act of 1940. These variable annuities are securities which would be required to be registered under Section 12 of the 1934 Act except for the exemption provided in Section 12(g) (2) (B). Here again, we do not believe that there is a necessity for the Commission to determine the form of variable annuity contracts which are not traded in a public exchange market and do not possess the qualities of negotiability and fungibility of stock certificates. We recommend (see Attachment D) that Section 406 be amended so that the provision is inapplicable to variable annuity contracts issued by insurance companies. Sincerely yours, PAUL J. MASON, Associate General Counsel. ROBERT J. ROUTIER, Associate General Counsel. Attachments. ATTACHMENT A ALIA PROPOSED AMENDMENT TO H.R. 5050-TITLE IV Life company broker-dealers-Section 403 SEC. 403. Section 15 (c) of the Securities Exchange Act of 1934 (15 U.S.C. 780 (c)) is further amended by adding the following new paragraph at the end thereof: "(6) No broker or dealer shall make use of the mails or of any means or instrumentality of interstate commerce and no member of a national securities exchange shall make use of an exchange facility to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers' acceptances, or commercial bills) in contravention of such rules and regulations as the Commission shall prescribe as necessary or appropriate in the public interest or for the protection of investors to regulate the time and method of making settlements, payments, and deliveries and of opening, maintaining, and closing accounts. Nothing in this paragraph shall be construed (i) to affect the authority of the Board of Governors of the Federal Reserve System, pursuant to section 7 of this title, to prescribe rules and regulations for the purpose of preventing the excessive use of credit for the purchase or carrying of securities, or (ii) to authorize the Commission to prescribe such rules or regulations for such purpose. Notwithstanding the foregoing, the provisions of this paragraph with respect to the regulation of broker-dealers as to the time and method of making settlements, payments, and deliveries and of opening, maintaining, and closing accounts shall not apply to persons whose business as a broker or dealer consists exclusively of the sale of (i) variable contracts or policies issued by insurance companies; or (ii) redeemable securities issued by registered open-end investment companies or unit investment trusts." ATTACHMENT B ALIA PROPOSED AMENDMENT TO H.R. 5050-TITLE IV Exclusion from the Terms "Clearing Agency", "Securities Depository" and "Transfer Agent"-Section 402 "SEC. 402. *** (22) (D) The terms 'clearing agency' and 'securities depository' shall not include (i) any person who performs such functions solely with respect to variable contracts or policies issued by insurance companies; (25) *** The term 'transfer agent' shall not include any person who performs such functions solely with respect to variable contracts or policies issued by insurance companies." ALIA PROPOSED AMENDMENT TO H.R. 5050-TITLE IV Participation of life companies in securities depositories or clearing agenciesSection 404 "SEC. 17A. ** (d) An applicant shall not be registered as a clearing agency or a securities depository unless the Commission finds that- * (2) the rules of the clearing agency or securities depository provide that (A) all registered brokers or dealers are members of a national securities exchange, (B) other registered clearing agencies or securities depositories, (C) registered investment companies, (D) insurance companies, (E) banks (as defined in section 2(a) (5) of the Investment Company Act of 1940), and (F) such other persons or classes of persons as the Commission may from time to time designate by rule as appropriate to the development of an integrated national system for the prompt and accurate processing and settlement of securities transactions are eligible to become participants in such clearing agency or securities depository, subject only to such other rules of the clearing agency or securities depository as are expressly permitted under this paragraph." ALIA PROPOSED AMENDMENT TO H.R. 5050-TITLE IV Form of certificate-Section 403 SEC. 406. Section 12 of the Securities Exchange Act of 1934 (15 U.S.C. 781) is amended by inserting after subsection (i) the following new subsections: (j) It shall be unlawful for an issuer, any class of whose securities is registered under this section or which would be required to be so registered except for the exemption from registration provided by paragraph (2) (B) or (2) (G) of subsection (g), by the use of any means or instrumentality of interstate commerce, or of the mails, to issue, either originally or upon transfer, such securities whose form or format contravenes such rules and regulations as the Commission may prescribe as necessary or appropriate for the prompt and accurate processing of transactions in securities. The provisions of this subsection shall not apply to variable annuity contracts issued by insurance companies." CONFERENCE OF STATE BANK SUPERVISORS, Re: H.R. 5050-The Securities Exchange Act Amendments of 1973 Hon. JOHN E. MOSS, DEAR CONGRESSMAN Moss: The Conference of State Bank Supervisors (CSBS) is pleased to present its views regarding Title IV of H.R. 5050 which is now being considered by the House Subcommittee on Commerce and Finance. As the primary regulatory and chartering source for the country's nearly 9000 state-chartered banks, our supervisors are vitally interested in those provisions of Title IV as they affect the transfer agent functions of banks, and the operations of financial institutions recently organized to serve as securities depositories. For many years banks have served as transfer agents for corporations. These banks, where state chartered, have been subject to regular examination both by federal and state bank regulatory agencies and their transfer operations scrutinized in connection with these examinations. Of more recent origin are the depositories organized for the purpose of collecting and immobilizing stock certificates. There are today three of these regional depositories. The Depository Trust Company, a limited purpose trust company operating under New York State law is regulated primarily by the New York State Banking Department. It has chosen to become a member of the Federal Reserve System. Depository is now fully operational. The Midwest Securities Trust Company is also functioning as a depository under state charter and the Pacific Securities Depository, a state-chartered institution, is moving forward in its operational status. Based upon an examination of pertinent provisions of Title IV of H.R. 5050 as well as the provisions of S. 2058-The Securities Processing Act of 1973— which latter bill was passed by the Senate during August 1973, it is the opinion of CSBS that the provisions of S. 2058 are preferable as they relate to the regulatory jurisdiction to be imposed on banks in their transfer agent functions, and also regarding securities depositories which are organized as financial institutions under state law. Under H.R. 5050 the Securities and Exchange Commission (SEC) would register all transfer agents (bank and non-bank), and securities depositories. It would establish all rules that are necessary and appropriate in the public interest or for the protection of the public. And, under H.R. 5050, the SEC would also have responsibility for enforcing its rules, including the right to conduct examinations of the transfer functions of banks and of depositories organized as banks under state charters. In contrast to the foregoing, under S. 2058 while the SEC would still retain responsibility for and authority over the proposed securities clearing and settlement system, the federal banking agencies would carry out the enforcement responsibilities for regulations which would be set primarily by the SEC. The CSBS is in agreement with the provisions of both bills that give the SEC responsibility for assuring there is compatability in operations between banks serving as transfer agents, and other facilities in the securities handling procedures. However, it is the position of CSBS that responsibility for enforcing such compatibility standards, for establishing procedures regarding the safekeeping of securities and funds, and similar internal operations should be retained by the appropriate federal bank regulatory agencies, and by the respective state banking department where state-chartered banks are concerned. The provisions of Title IV of H.R. 5050 which would give to the SEC authority to enforce its rules affecting banks serving as transfer agents, including the right of examination of these institutions, would not relieve the bank regulatory agencies, federal or state, of the responsibility for ascertaining the safety and soundness of these banks, or whether they are conducting their transfer operations in accordance with applicable regulations. The provisions of H.R. 5050, therefore, would result in duplicatory examination and supervision which would cause an unnecessary burden and cost to banks carrying out transfer agent functions. These costs ultimately would be borne by bank customers. We believe, therefore, that the regulatory design of S. 2058 pertaining to the enforcement of regulations affecting bank transfer agent operations is preferable to those of H.R. 5050. CSBS believes that for the same reason the provisions of S. 2058 affecting securities depositories are more appropriate than those of Title IV of H.R. 5050. The three securities depositories which are now in various stages of operation are all state-chartered institutions, and in all likelihood each will become a member of the Federal Reserve System. The banking agencies, both federal and state, already have the experience and expertise to perform the necessary examination and inspection functions related to the operation of these special purpose financial institutions. State banking departments, by state law, will have to inspect these institutions to assure that they are operating in accordance with applicable laws, including those that might result from the present legislative proposals. As a consequence, if the provisions of Title IV of H.R. 5050 were to become effective, they would lead to an unnecessary duplication of supervisory oversight. In addition to the foregoing, it would appear that if the securities depositories are to achieve the objective of immobilizing stock certificates in securities transactions, there must be significant participation by banks that place in such depositories securities held by banks in a fiduciary or other capacity. It is believed that banks, particularly those located outside the areas where depositories are situated, would more readily participate if the depositories were supervised and regulated by the existing banking agencies at the federal and state levels. In conclusion CSBS desires to point out that S. 2058 contains provisions requiring that the federal bank agencies "shall consult and cooperate with each 20-306-74-pt. 5-15 other and, as may be appropriate, with State banking authorities having supervision over banks operating as clearing agencies. . . ." Similar provisions are enunciated for consultation and cooperation between federal and State banking departments where banks acting as transfer agents are involved. CSBS believes these are highly desirable provisions. It is recommended, however, that in line with the objectives of avoiding needless duplication in the regulation and examination of these institutions, where they are state chartered, that statutory language of any legislative proposal clearly provide that the appropriate federal bank agency shall take into consideration any program of examination and enforcement carried out by a state banking department. This could prevent needless expense to individual customers that might ultimately ensue from such duplication. The Conference of State Bank Supervisors congratulates the Subcommittee for its efforts to provide for the development of a highly efficient, coordinated system to permit the prompt and accurate processing and settlement of securities transactions. The Conference believes that banking regulatory agencies must play a major role in the development and implementation of such a system. Because the provisions of S. 2058 permit federal and state banking departments to exercise greater responsibilities in the securities handling procedures than does Title IV of H.R. 5050 CSBS supports the supervisory approach of S. 2058. Cordially, LAWRENCE E. KREIDER, Executive Vice President-Economist. CORPORATE TRANSFER AGENTS ASSOCIATION, INC., April 25, 1973. Hon. JOHN E. Moss, Chairman, Subcommittee on Commerce and Finance, Washington, D.C. DEAR CONGRESSMAN MOSs: In accordance with your notice of March 9, 1973, The Corporate Transfer Agents Association, Inc. would like to make known its position regarding H.R. 5050. Before commenting, however, we would like to call attention to our position taken at the September 1972 hearings with respect to bill H.R. 14826. We did not oppose its adoption on the grounds that H.R. 14826 called for a well regulated National Depository and clearing corporation, provided for equitable control of depositories, clearing corporations, banks and brokers through a uniform single agency control and provided for the elimination of the negotiable certificate in settlements between broker dealers and depositories. In reviewing the committee working copy of H.R. 5050, it appears your committee has agreed that some of our views which were last expressed at the September 1972 hearings had merit and we are appreciative of the fact that consideration was given to our views. However, we do have some comments to make and since Title IV-Securities Processing deals with our phase of the securities industry, we shall address ourselves to this section of the bill. Our first comment has reference to that portion of Sec. 17A(3) (b), page 99, which deals with the registration of transfer agents. We feel that the details necessary for registration should be spelled out rather than attempting to cover the situation by the following remark ***"and such other information in such detail as the Commission may by rule require as necessary or appropriate in the public interest," ***. Then, on page 105 starting on line 19, the bill speaks of denying registration of a transfer agent where the applicant does not have procedures or the means to be able to comply with the provisions of this section and the rules and regulations promulgated under those provisions, etc. Here again, we feel the procedures or the means should be detailed. Page 115 beginning with line 19, the bill speaks of the treatment given requests for confidential treatment. We feel a positive approach should be taken here, ie., the Commission should advise one way or the other, since the company may wish to withdraw its application if the furnished information is to be made public. It also appears possible that the Commission might just fail to even review the matter and under this set-up, the information would be made public after 30 days. |