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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
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 proced 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 Commission'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 (0) 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 “(We 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.
Subsection (q) of proposed Section 17 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. 3876 (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 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 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.
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 8 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 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 hefore the Subcommittee on Title I of H.R. 5050, June 7, 1973, p. 297, this hearing. and accurate processing and settlement of securities transactions. While we support all efforts to eliminate duplicative costs, we are not convinced that the functions of transfer agent and registrar should always be combined, particularly where an issuer acts as its own transfer agent. There may be sound reasons for maintaining a separate registrar to monitor the number of shares authorized and outstanding. In addition, we believe that the Commission's rulemaking power to assure the prompt and accurate processing and settlement of securities transactions should extend to issuers whose securities are traded in the over-thecounter markets.
Section 407 of the bill would add new Subsection 19(c) to the Act and direct the Commission to make a study of the registration of securities in street name. We concur that such a study should be made. However, on page 117, lines 19-20, the statement "with particular reference to Section 14" should be expanded to include Sections 12(g) and 15(d) of the Act since those sections impose periodic reporting requirements based upon the number of record holders. If the "street name" study legislation is enacted, we believe that these two areas are closely related and that it would be appropriate to combine them into a single study.
Section 408 would amend Section 28 of the Act to provide an exemption from state and local taxation on changes in beneficial or record ownership of securities effected through the facilities of a registered clearing agency or depository, or upon the delivery or transfer of securities effected through such agency or depository, unless such changes would otherwise be taxable if the clearing agency or depository were not located within the jurisdiction of the taxing authority. We support this amendment.
Section 409 would add a new Section 19A to the Act, which would require the reporting of lost and stolen securities and the fingerprinting of persons involved in the securities business or securities handling process. We assume that the language of this Subsection would permit the Commission to designate a private contractor to receive reports of lost and stolen securities.
We believe that Subsection 19A (a) (1) also should be modified to give the Commission authority to require that persons engaging in securities transactions make an appropriate inquiry to determine whether the securities involved have been reported as missing, lost or stolen. Consideration should be given to including counterfeit securities in this Subsection.
Mr. Moss. Mr. Breckinridge!
Mr. BRECKINRIDGE. No questions, Mr. Chairman, I just thank Mr. Evans for his testimony.
Mr. Moss. Mr. Ware?
I would raise the question, because I don't believe you referred to it in your testimony, with regard to dual responsibility, shall we say, of banks and the Commission. As a practical matter, would not the Commission have a problem of additional staffing if the bank regulatory agencies do not oversee the banks in their transfer activities?
Mr. Evans. Yes; this would put an additional burden on the Commission and would require additional staffing.
Mr. WARE. All right, you referred to your willingness to submit some language-I am trying to find it here--in connection with the registration of service bureaus?
Mr. Evans. Yes.
Mr. WARE. And it seemed to me it would be helpful if the committee could have the benfit of your recommendations.
Mr. Evans. We would be happy to work with the committee staff in drafting some language or draft some and submit it if you would prefer.
Mr. Moss. I would suggest that the reservation be made at this point to receive the material suggested by Mr. Ware. Mr. Curtis and the other members of the staff will be in touch with you to work toward the development of such information.
Mr. WARE. Thank you, Mr. Chairman, and thank you, Mr. Evans. [The following material was supplied for the record :]
DRAFT STATUTORY LANGUAGE TO PROVIDE THE COMMISSION WITH AUTHORITY OVER
INDEPENDENT SERVICE BUREAUS
In his statement of September 11, 1973, regarding Title IV of H.R. 5050, Commissioner John R. Evans indicated that the Commission felt it should have authority to regulate independent service bureaus and offered to assist the Subcommittee in framing an appropriate section to provide the Commission with such authority. In response to the Subcommittee's request for such a provision, we suggest that the following statutory language would provide us with direct regulatory authority :
Section 17B (a) One hundred eighty days after the effective date of the Securities Exchange Act Amendments of 1973, it shall be unlawful for any person (other than a registered broker, dealer or member), directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the function of a service bureau with respect to any broker, dealer or member, unless such person is registered in accordance with subsection (b) of this section. The Commission, by rules and regulations or by order, upon its own motion or upon application, may conditionally or unconditionally exempt any service bureau or class of service bureaus from any provision or provisions of this section or any rule or regulation prescribed under this section if the Commission finds that the application of such provision or provisions to such service bureau or class of service bureaus is not practical or not necessary or appropriate in the public interest or for the protection of investors.
(b) A service bureau may be registered for the purposes of this section by filing with the Commission an application for registration, which shall contain such information in such detail as to such service bureau as the Commission may, by rule or regulation, require as necessary or appropriate in the public interest or for the protection of investors.
(c) No service bureau registered under this section shall, directly or indirectly, engage in any activity as a service bureau with respect to a broker, dealer or member, in contravention of such rules and regulations with respect to financial standards, business experience, training and orerational capability as the Commission shall prescribe as necessary or appropriate in the public interest or for the protection of investors.
(d) The term service bureau means any person (other than a registered hroker, dealer, or member) which makes or maintains, for a broker, dealer or member, accounts, books or records with regard to transactions in securities, required to be kept by such broker, dealer or member.
Mr. Moss. Mr. Evans, I think in order to expedite the questionsI have talked with Mr. Curtis and we have a number of areas to develop, so I will ask him to proceed with the questions. Mr. Curtis ?
Vr. CURTIS. Thank you, Mr. Chairman.
First, Commissioner Evans, as you well know, the legislative reorganization act requires that the committees of Congress report a 5-year cost estimate to accompany legislation brought to the floor.
For that purpose, Mr. Chairman, I would like to ask that the record be reserved for the submission by the SEC of their estimates of the costs for the next 5 fiscal years should title IV of H.R. 5050 be adonted as proposed.
Mr. Moss. Without objection, the reservation will be made. [The following information was supplied for the record :]