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stock from these large banks, we could see another "paper crunch" that would make the last one look pale in comparison.
I might add that my Company is still on a 24-hour basis for delivery of transfers and we intend to keep it that way.
If it would be helpful for me to appear before your Subcommittee, I would be happy to come to Washington and present my views in greater detail before your committee members. Sincerely,
G. D. PEARSON,
JOHNSON, PARSONS & KRUSE,
Salt Lake City, Utah, September 18, 1973. Re: Opinion on regulation of transfer agencies. Hon. JOHN Moss, Chairman, House Subcommittee on Commerce and Finance, House of Representatives, Washington, D.C.
DEAR CHAIRMAN Moss: Since the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934, federal statutory and regulatory controls over almost all sectors of the securities industry have expanded in number and sophistication. Thus it seems anomalous that the registrar and transfer agent, although natural and legitimate parts of the industry, have not come under comparable regulation, despite a number of practices within this segment of the industry rich with potential for abuse.
It is my belief that, while many transfer agencies throughout the country are reputable, efficient, sophisticated and knowledgeable in their operations, and sensitive to their responsibilities, problems do exist in the industry which should be considered by the Subcommittee for the purpose of enacting legislation designed to improve the quality of service rendered by transfer agencies.
Of first importance in consideration of the role played by transfer agencies is enforcement of the registration requirements of the Securities Act of 1933. The provisions of the Act make it unlawful for any person to utilize means of interstate commerce to sell, or deliver before or after sale, any security unless a registration statement is in effect as to the security, or to offer for sale any security unless a registration statement has been filed. However, exemptions from registration allowed by Section 5, for example, transactions not involving any public offering, transactions by any person other than an issuer, underwriter or dealer, transactions by a broker upon an unsolicited customer order to buy, transactions involving certain corporate reorganizations, and transactions coming un er the so-called “1% rule” or “leak out” provisions, all play a significant role in the securities market and must be rigorously supervised if the investing public is to be protected. The role played by transfer agents is significant since persons active in the securities industry-issuers, broker-dealers, individuals and their counsel—as a matter of practice rely on transfer agents for information which is crucial to the determination as to whether an exemption is available. There is substantial evidence to suggest, however, that many agents and, to some extent, the regulatory agencies are not fully aware of the reliance which the rest of the industry places on transfer agents.
Transfer agents are in the best position to maintain a system of controls based on records such as stop-transfer instructions and restrictive legends utilized by issuers to prevent secondary distribution of shares subject to private placement or controlling person restrictions. In addition, records maintained by transfer agents are critical to brokers to determine if a distribution of securities is made by an underwriter on behalf of his principal. The transfer agent is thought to be the most logical source of this information because the issuer or selling customer is viewed by the Commission as being self-serving and of diminished reliability and because transfer agents are generally believed to maintain a file containing a list of persons in a control relationship with the issuer, shareholder agreements containing transfer restrictions, a "stop-transfer” list, a ledger of all transfers and a copy of basic corporate documents such as Articles of Incorporation and By-Laws. In short, it is believed that the transfer agent is or should be the best, although admittedly not the exclusive, relatively independent source of this information.
As an ever increasing number of broker-dealers are beginning to understand, however, many transfer agents are not sufficiently impressed with or aware of the trust placed in them by the industry. Records are often incomplete, inacurrate or not maintained at all. A requirement that the transfer agent maintain the necessary records should be a minimum standard to help solve this problem and improve the quality of transfer agency services.
Transfer delays are a second problem which should be seriously considered by the Subcommittee. Delays in transfer may be attributed to several causes. For example, under the Uniform Commercial Code, Section 8403(1) transfer agents on “notice” of an “adverse claim” respecting the shầres are under å duty to inquire into such claims by some reasonable means and may delay, transfer of the shares for as much as thirty days pending further action by the claimant. Barring notice of a second adverse claim received by the transfer agent during the investigation of a previous notice of adverse claim, the delays resulting from compliance with the U.C.C. are not significant.
On the other hand, transfer delays may be caused by transfer agent inefficiency and incompetence and, not uncommonly, by design which have a serious detrimental effect upon the securities market. The marked disparity between the degree of regulation imposed on the transfer agent and that imposed on the rest of the securities industry has made the transfer agent segment of the industry disproportionately easy to enter. This disparity has produced transfer agencies which are not equipped to handle the complex responsibilities and problems inherent in the wide variety of possible transfer situations. The present minimal level of regulation fails to identify and eliminate inadequate transfer agents.
The transfer agent is, as a practical matter, totally dependent upon the issuer for his continued livelihood. On occasion this dependence has permitted unscrupulous issuers or promoters to instruct their transfer agent to deliberately slow down the transfer certificates or to deliver securities only upon further instruction from the issuer unless sufficiently pressured by the transferees. Such a deliberate slow-down may allow unscrupulous issuers and their promoters to subtly but effectively manipulate the market price of securities by restricting the supply of shares circulating in the market place and by creating pressure on the broker-dealer to deliver the bargained for shares which have the effect of driving the price of the security to a price it might not otherwise achieve. Since the transfer agent is usually in the background, not as a purchaser or seller of securities, but as an agent of the issuer, the fraudulent misconduct is difficult to discover and prosecute.
Responsibility to insure compliance with Section 5 is imposed by the SEC upon (a) the issuing company, (b) the actual seller of the securities, and (c) any securities broker or dealer directly or indirectly involved in the transaction. Transfer agents are conspicuously absent from this otherwise comprehensive pattern of responsibility. Because transfer agents are so critical to compliance with the securities registration provisions and since the irresponsibility, incompetence and corruption of some transfer agencies presents a very real, continuing danger to the securities industry, their reliability must be insured through strong regulatory measures.
I suggest that an integrated sysetm of transfer agency regulation should contain at least three key elements :
1. Record maintenance requirements;
2. Licensing requirements providing for some form of basic examination emphasizing the Uniform Commercial Code and relevant provisions of the federal and state securities laws; and
3. Minimum transfer delivery requirements.
1. All cancelled certificates ;
5. All correspondence, legal opinions, reorganization agreements, investment letters and similar relevant documents;
6. All transmittal letters.
As a corollary to the maintenance of these records, steps should be taken to deny unscrupulous transfer agents the capacity to distribute unregistered securitie or to manipulate markets by requiring:
1. Periodic inspection and perhaps other procedures designed to avoid possible improper alterations ;
2. Access for broker-dealers and other individuals with a legitimate interest to the transfer agents' files which relate to publicly traded companies ;
3. Prompt transfer, or in some cases return, of all securities tendered, similar to and consistent with the requirement that brokers promptly pay for all securities purchased.
Entrance into the transfer agency business should be regulated through federal licensing in conformity with certain uniform minimum requirements. Care should be required to define precisely the disabilities which would preclude licensing or which would require sanction. Of course, the role of the transfer agent seems to be sufficiently unique that licensing criteria for that function would not have to be identical to the criteria used for other functions.
Most of the securities community is subjected to stringent, complicated reg. ulations and restrictions under current securities law. At the same time, the securities registrar and transfer agents, who occupy an influential position in the securities business, remain almost completely free of regulation. The neglect or affirmative misconduct of some transfer agents has inflicted economic harm and defeated the intended purposes of securities regulation. The economic repercussions have touched all segments of the securities industry. The structure and make-up of the securities industry as well as the public interest as expressed in the statutes and regulations governing that industry compel the conclusion that regulation of transfer agents in one form or another is imperative.
I therefore support passage of H.R. 5050 as it relates to transfer agencies as authorization for the Securities and Exchange Commission to enact more specific rules and regulations governing the quality and conduct of this segment of the securities industry with the hope that the Commission may adopt in whatever form, at least the minimum substantive provisions outlined above. Yours very truly,
JOHNSON, PARSONS & KRUSE
SECURITIES PROCESSING SERVICES, INC.,
New York, N.Y., May 4, 1973. To The Committee on Interstate and Foreign Commerce, House of Representa
tives of the United States of America, Washington, D.C.: Re: Comments Relating to the Proposed Amendment of the Securities Exchange
Act of 1934, Designated H.R. 5050, Specifically Title IV thereof. HONORABLE SIRS: We have advocated and totally support the legislative efforts of the Congress and the Securities and Exchange Commission to bring all areas of securities processing under direct regulation by the Commission. In numerous meetings with the staff of the Commission throughout the past two years, Securities Processing Services, Inc. (“SPS”) has strongly voiced its support of regulation and, in particular, the concepts which your Committee has embodied in H.R. 5050.
We find, however, in Title IV of H.R. 5050, that no provision seems to be made to allow private enterprise to contribute to the solution of the problems faced by the industry in the efficient and expeditious settling of securities transactions. Further, it appears to us that this legislation restricts the business of clearing transactions to those same entities which failed to meet the needs of the industry and the public in 1968–1971 and which were, in fact, themselves contributors to the problems of that time.
Title IV in so restricting the business of settling transactions to these entities has failed to make provision for the private sector in the clearance of securities transactions. While the proposed amendment of SEC 402, Section 3 (a) of the Securities Exchange Act of 1934 defines the term "clearing agency” (Page 75, H.R. 5050) with sufficiently broad language to encompass not only subsidiaries of self-regulatory institutions such as the Stock Clearing Corporation and the National Clearing Corporation, it would also apply equally to private clearing agencies. However, when one reads further the provisions of Title IV (SEC.17A (d) (2) & (3)., Pages 82 and 83, H.R. 5050), it becomes apparent that private enterprises could never register as clearing agencies and maintain their identity as a private enterprise. They would be prohibited from doing so by virtue of the fact that the Act would require membership in these private "clearing agencies” by other broker-dealers, registered claring agencies, and other participants and would further require that these members, participants, etc., who would be clients of the private clearing agencies, be allowed to join in the formulation of rules with respect to its operation as a clearing agent. Furthermore, in subparagraph (8) (page 85), the private clearing agencies would be required to adopt "fair and orderly procedures with respect to the disciplining of participants ... a matter which is hardly the role of individual enterprise.
We submit that the private sector of the securities processing community of the industry has an important contribution to make, one that should not be overlooked.
SPS was incorporated in the State of New York, in June, 1970. It's certificate of incorporation, which was submitted to and approved by the New York Stock Exchange prior to filing and revised in accordance with their suggestion, clearly restricts its business to that of acting as a clearing agent and does not permit SPS to act as a securities broker or dealer. At present, a wholly-owned and fully-guaranteed subsidiary of W. E. Hutton & Co., 14 Wall Street, New York, New York, (a partnership which is a member of the New York Stock Exchange, the American Stock Exchange and other leading stock and commodity exchanges) SPS was formed in order to fill the void which has existed in the securities industry, specifically, to provide high quality, efficient, securities clearance services to banks, brokers and dealers throughout the United States at competitive rates.
Prior to the formation of SPS, clearing services per se were provided throughout the industry exclusively by commercial banks and certain subsidiaries of national stock exchanges and, by certain broker-dealers as an adjunct to their primary function of executing purchases and sales for other broker-dealers. In our opinion these organizations considered providing these services to be of secondary importance to their primary purposes and functions and consequently did not make the investments of monies and in high-level management and personnel essential in these areas. Since the vast majority of securities transactions are effected and settled in New York, the dominant factors of the securities clearance industry were, and are, the major New York commercial banks, certain New York broker-dealers, the New York Stock Exchange and, its subsidiary, Stock Clearing Corporation. Whenever an industry is so dominated as the securities clearance industry has been and continues to be, by so few, the general effect is that the services provided are at best adequate and the fees for such services are not truly dependent upon the free forces of the market place. And, as evidenced by the sometimes catastrophic back-office problems on Wall Street for the period of 1968 through 1971, such conditions can be chaotic and totally adverse to the interests of the general public.
It is common knowledge within the industry that during the high volume periods of 1968 through 1971, the dominant institutions, which were then providing such clearing services, became incapable of absorbing the increased volume, effectively and efficiently. It was because of these circumstances and in response to the need for alternatives that SPS was created.
In its brief three-year history, SPS has clearly helped to alleviate settlement problems in the industry and has provided a viable alternative at competitive rates. This is evidenced by viewing its growth in terms of the number of its clients and transactions handled in the past three years, a growth it has experienced by referrals from satisfied bank and broker-dealer customers (See Appendix A annexed hereto). From an initial client base of “nine” in June, 1970, SPS presently serves more than one hundred and twenty financial institutions—banks, brokers and broker-dealers (including twenty New York Stock Exchange member firms, located throughout the United States) i.e. First Pennsylvania Bank and Trust Company of Philadelphia, Indiana National Bank and American Fletcher National Bank of Indianapolis, First Boston Corporation of New York, W. E. Hutton & Co. et al and has become one of the five largest services in the clearance of municipal securities in the United States. During the last year, SPS has also entered into the area of delivery and collection of security drafts on a nationwide basis and now provides one-day delivery/collection services to twelve of the major financial centers in the United States-to our knowledge, the most efficient and comprehensive such service offered to the industry. It is for these reasons SPS is extremely concerned with the legislation (H.R. 5050), known as the Securities
and Exchange Act Amendments of 1973, which has been referred to this Committee.
As we stated at the outset, Title IV has failed to make provision for the private sector in the clearance of securities transactions to the point where private enterprise such as SPS would be forced to go out of business. While the language of the definition of a "clearing agency" appears sufficiently broad to encompass not only subsidiaries of self-regulatory institutions, such as the Stock Clearing Corporation and the National Clearing Corporation, it would also apply equally to private clearing agencies such as SPS. But when one reads further the provisions of Title IV (SEC. 17A(D) (2) & (3), Pages 82 and 83, H.R. 5050), it becomes apparent that private enterprises such as SPS could never register as a clearing agency and maintain their identity. They would be prohibited from doing so by virtue of the fact that the Act would require membership in SPS, by other broker-dealers, registered clearing agencies, and other participants and would further require that these members, participants, etc., who are presently SPS's customers, be allowed to formulate rules with respect to SPS' operation as a clearing agent. Furthermore, in subparagraph (8) (Page 85) SPS would be required to adopt "fair and orderly procedures with respect to the disciplining of participants . ...", i.e. SPS would be required to discipline its customers.
In so doing, the Amendment eliminates the private sector from the securities processing industry thereby granting a virtual monopoly to self-regulatory institutions and their subsidiaries, defeating in part, the Act's stated purpose of perfecting the mechanism of a free and open market. To do so, in our opinion, is to fail to protect investors and the public interest. As has been, and remains, evident from our existence and our growth we, in the private sector, offer a viable alternative at competitive rates to the industry. We could not exist if we did not provide high quality, efficient, securities clearance services to our customers at competitive rates. And while rates are important, of greater import to our customers because of the effect it, in turn, will have on their customers, is our ability to clear and to assist in the settlement of transactions efficiently and expeditiously. Is it in the public interest then to remove this segment of the securities clearing industry from the industry when with proper regulation they can continue to play a vital role?
It is respectfully submitted that these proposed amendments to the Act should be broadened or amended so as to permit effective competition from the private sector subject, however, to registration with and regulation by the Commission.
We further recommend that modification of Title II be considered to provide that national securities exchanges and national securities associations as well as their subsidiaries, be prohibited from requiring their members to use the facilities of any specific clearing agency or securities depository. This prohibition is absolutely essential if the forces of free enterprise and competition are to be allowed to make their presence felt in this important segment of the industry. Respectfully,
MICHAEL V. CAGGIANO,
APPENDIX A SECURITIES PROCESSING SERVICES, INC., TRANSACTION AND CUSTOMER VOLUME RECORD, JUNE 1970–1973
Number of transactions
value of securities
9 $54,000,000 19 358,000,000 45 1, 118,000,000 69 1,312,000,000 74 2,029,000,000 105 2, 111,000,000 135 2,600,000,000