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the Commission and the bank regulatory authorities. Specifically, the Commission recommended that depositories and clearing agencies, which are inextricably a part of the securities handling process and which traditionally have been subject to regulatory oversight by the Commission, should continue to be under the Commission's jurisdiction regardless of whether they were organized as banks. The Commission believes that its objective of a single, unified, nationwide system for processing securities transactions could best be fulfilled if depositories and clearing agencies are subject to regulation by the Commission. Thus, without precluding supervisory oversight by banking authorities where a depository is a bank and, in fact recommending cooperation between the Commission and the bank regulatory authorities, the Commission proposed in H.R. 14567 to retain its authority to inspect depositories, and to require reports from, and enforce compliance by, depositories with the regulations to be promulgated by the Commission.' Similarly, with regard to transfer agents which are not banks, the Commission would have had full responsibility for setting standards and insuring compliance with those standards. In the case of banks which are transfer agents, the Commission proposed that while it would have the authority to set standards; registration, inspection and enforcement responsibilities would be undertaken by the federal bank regulatory authorities. The Commission believes that this division of responsibilities for bank transfer agents should be considered by the Subcommittee.
We also note that it is possible for a transfer agent to perform the functions of a depository. At present, depositories have developed separately from transfer agents both because of the large number of transfer agents which serve individual issuers of securities and also because depositories were assigned different functions at their inception. The development of a transfer agent depository could, however, provide certain advantages since it would make depository services available to individual investors and smaller institutions whose participation in the securities markets may not be sufficiently active to justify their assuming the obligations of a participant in a pure depository. We believe that the bill should be modified specifically to permit the combination of depository services and transfer agent services in one institution if the Commission determines that this is feasible and desirable. We would be prepared to assist the Subcommittee in framing amendments which would keep this option open.
Our comments on specific provisions of Title IV are as follows:
Section 401 of H.R. 5050 proposes to amend Section 2 of the Securities Exchange Act of 1934 ("Act”) to provide that one of the purposes of that Act is the development of an integrated national system for the prompt and accurate processing and settlement of securities transactions. We believe this is appropriate.
SECTION 402 Section 402 of the bill amends Section 3(a) of the Act by adding definitions of the terms "clearing agency," "securities depository," "participant," "person associated with a participant,” “transfer agent,” “bank regulatory agency,” and "rules of a clearing agency” or “rules of a securities depository.” We note that there are certain exclusions from the terms "clearing agency," "securities depository,” and “transfer agent.” In this connection, we wish to note that investment company shares are frequently distributed through methods involving the use of intermediary organizations commonly referred to as “service agents." The functions performed by such service agents acting in various capacities simultaneously for investors, retailing dealers, principal underwriters and the issuing investment companies, may vary somewhat throughout the industry, but generally they include the following:
1. Receive orders accompanied by payment directly from shareholders for the purchase of fund shares.
1 The Commission believes that with respect to depositories which are organized as banks. bank regulators should not be preempted from responsibility in such areas as safekeeping of funds and securities, security and financial responsibility. And, to the degree their expertise can be utilized within the framework of the Commission's primary responsibility for the regulation of depositories, we would welcome such assistance.
2 H.R. 14567 contemplated that the appropriate bank regulatory authority would set the recordkeeping and reporting requirements for bank transfer agents. However, the Commission now believes that in order to achieve uniformity in recordkeeping and reporting with regard to all transfer agents. this authority to set recordkeeping and reporting standards should rest with the Commission.
2. Compute the portions of the investor's payment due to the fund, the underwriter, and the retailing dealer, record the transaction accordingly, and credit the monies to the appropriate accounts.
3. Credit the shares account of the investor with the number of shares purchased.
4. Mail a confirmation statement of the transaction to the investor, the retailing dealer, and the registered representative of the retailing dealer. Copies are usually also furnished to the principal underwriter, the fund custodian, and the fund for their records.
5. Similarly process orders for the liquidation of fund shares. 6. Calculate and process the reinvestment of cash dividends for shareholders.
Most such service agents, depending on the nature of the services they render, appear to come within the definition of the terms "clearing agency," "securities depository,” and “transfer agent” as they appear in Section 402. In this connection, we note that proposed paragraphs (22) (C)3 and (D) and the last sentence of proposed paragraph (25) of Section 3(a) of the Act contain certain exclusions from the terms “clearing agency," "securities depository” and “transfer agents" and we assume that there was no intent to include service agents who perform the above-listed functions in connection with mutual fund shares or variable annuity contracts under proposed paragraph (22) (D) and the exclusionary sentence in proposed paragraph (25). We suggest that the exclusionary sentence in proposed paragraph (25) be amended to make this clear.
Section 403 would amend Section 15(c) of the Act by adding new paragraph (6) to make clear that the Commission has authority to promulgate rules applicable to brokers, dealers and exchange members to regulate the time and method of making settlement, payments and deliveries, and opening, maintaining, and closing accounts. We believe the only meaningful reading of this section and the parenthetical phrase "other than an exempted security or commercial paper, bankers' acceptance or commercial bills” is that a broker or dealer whose business is entirely in exempted securities would not be subject to rules adopted pursuant to proposed Section 15(c)(6), but that a broker or dealer who engages in transactions in both exempted and non-exempted securities would be subject to the full effect of all the rules under that section. We recommend that this be made clear in the legislation.
Proposed New Section 17A of the Act
Subsection (a) (1) of proposed Section 17A would require all clearing agencies, securities depositories and transfer agents to be registered within 180 days after the effective date of the Securities Exchange Act Amendments of 1973 and would authorize the Commission to exempt any person, security, transaction, clearing agency, securities depository or transfer agent, or class or classes thereof from any provision or provisions of Section 17A or of any rule thereunder. We support this provision.
Subsection (a) (2) would require the Commission to report to Congress in its annual report the number of exemptions requested and granted and the basis or bases upon which such exemptions were granted. We have no comment on this Subsection.
Subsection (a) (3) would make clear that the provisions of proposed Section 17A shall apply only to securities and persons performing the function of transfer agent with respect to securities which are registered pursuant to Section 12 of the Act or which would be required to be so registered except for the exemption provided in Subsections (g) (2) (B) or (g) (2) (G) of Section 12. Proposed Section 17A would not apply to variable annuity contracts issued by insurance companies. The last sentence of proposed Section 17A (a) (3) should be revised to make clear that service agents who may perform clearing agent, depository or transfer agent functions in connection with variable annuity contracts would be subject to the requirements of proposed Section 17A.
3 We assume that the exclusionary language of proposed paragraph 22(C) does not include a depository organized as a banking institution with Federal Reserve membership (e.g., limited purpose trust company) by reason of safekeeping or other functions commonly performed by them on the date of the enactment of this paragraph. Some depositories are presently organized as limited purpose trust companies.
Subsection (b) of proposed Section 17A would provide that transfer agents may register with the Commission by filing a registration statement containing certain information. As we indicated in our introductory remarks, we believe that transfer agents which are banks should be required to register with the appropriate bank regulatory agency, with notice thereof to the Commission.
Subsection (c) of proposed Section 17A would provide that a securities depository or clearing agency may register for purposes of this section by filing with the Commission a registration statement containing specified information and such other information as the Commission may require. We support this provision.
Subsection (d) of proposed Section 17A would require the Commission to find as a prerequisite to registration that a securities depository or clearing agency meets the criteria set forth in this subsection.
We note that this Subsection, as well as other Subsections, contemplates that a clearing agency or securities depository will be a self-regulatory organization. As the Subcommittee is aware, certain privately-owned entities will be encompassed by the definition of a clearing agency and depository. Some of these organizations, particularly certain clearing organizations, have not been selfregulatory bodies and, under the bill, probably should not be. We note that the bill provides the Commission with broad exemptive powers which could be used to exempt such entities from any clearing agency or depository requirements which we deem to be inappropriate or unnecessary to carry out the purposes of this Section.
Subsection (d) (2) would require that the rules of the clearing agency or securities depository provide that certain enumerated classes of persons are eligible to become participants subject only to certain exclusionary rules set forth in that Subsection. With respect to persons not specifically designated in Subsection (d) (2), the clearing agency or securities depository may impose additional enumerated grounds for restricting or conditioning participation.
1. We believe that clause (2) (A) of Subsection (d) should be corrected to read "all registered broker or dealers or members of a national securities exchange."
2. We note that Subsection (d) (2) would, among other things, give a clearing agency or securities depository discretionary authority to deny participation to persons who have been expelled or suspended by a registered clearing agency or securities depository, during the period of such expulsion or suspension. The Commission believes that its approval should be required before a person currently under suspension or expulsion from a clearing agency or securities depository may become a member of another clearing agency or securities depository.
3. The Commission believes that the rules of a clearing agency and securities depository should allow these entities to impose additional criteria to those set forth in Subsection (d) (2) of proposed Section 17A for admission to the clearing agency or securities depository, provided the Commission determines that such additional criteria are necessary or appropriate in the public interest, for the protection of investors, or to assure the prompt and accurate processing and settlement of securities transactions. The primary purpose of the Commission's suggestion in this regard is not to limit entry to a clearing agency or securities depository, but rather to ensure that all broker-dealers and other financial institutions will have access to such entities on a reasonable and non-discriminatory basis and at the same time to protect the financial integrity of these entities and their participants.
Subsection (e) of proposed Section 17A would require the Commission to publish notice of the filing of a registration statement of a clearing agency or securities depository and to afford interested persons an opportunity for comment. Within 60 days of filing of a registration statement by a clearing agency, securities depository or transfer agent the Commission would be required by order to grant such registration or to institute appropriate administrative action to determine whether the application should be denied. The Commission does not object to a requirement that it institute administrative action to determine
• The sixty day period within which the Commission is required to act with regard to securities depositories and clearing agencies is unduly short in view of the fact that the notice of filing must be sent out for publie comment. Since the Commission must prepare a release announcing the filing, await comments on the filing, and analyze these comments, we suggest that the Commission be allowed 120 days to act in the case of securities depositories or clearing agencies.
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 procedures 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.