MANPOWER AND COST ESTIMATES FOR 5 FISCAL YEARS IN CONNECTION WITH THE COMMISSION'S PROPOSED REGULATORY RESPONSIBILITIES UNDER TITLE IV OF H.R. 5050

This memorandum is in response to the Subcommittee's request for cost and manpower estimates for the next five fiscal years regarding the Commission's regulatory responsibilities under Title IV of H.R. 5050. If Title IV were to become law in its present form, the Commission estimates it would need the following additional staff and incur the following average yearly costs:

! This estimate includes the program seeking the elimination of the certificate in street side settlement which entails a 4-year study at approximately $200,000 per year. No manpower requirements were estimated in connection with this study. The study of the registration of securities in nominee name is planned as a 1-year study which will cost approximately $150,000 and will require 8 persons. The estimated costs incorporate a 5 percent per year cost increase on items other than the studies.

It should be noted that our estimated costs and manpower requirements are substantially lower than those estimated last year in connection with H.R. 14826, which was similar to Title IV. The reduction is the result of the increased staff which the Commission has acquired in the securities processing area as well as the expertise and experience gained by its personnel in this area. It should be realized, however, that these estimates are based on present considerations, and that future developments may require substantial revisions.

Mr. Moss. In order that we have meaningful information, is it possible for the Commission to give us estimates as to what additional staff might be required by the bank regulatory agencies to take on the duties envisioned in H.R. 5050 for the Commission itself? We would grant that there will be additional staffing requirements imposed upon the Commission, but, if the Commission does not perform all of the duties envisioned in H.R. 5050, and they were to be performed by other agencies, it would also be necessary to have a measure of additional staffing.

Mr. EVANS. This would be difficult for us to do.

Mr. Moss. If it is difficult for the Commission, the committee would undertake to develop the material.

Mr. EVANS. I think the problem that we would have, Mr. Chairman, is that we, in the absence of knowing where that division of responsibility might be, would not have a basis on which to make such esti

mate.

Mr. Moss. Perhaps we could develop that on the basis of the bill adopted by the other side.

Mr. EVANS. That might be better.

Mr. Moss. You would work with Mr. Rowen and Mr. Curtis.

Mr. EVANS. We would be happy to. We have made estimates for 1 year which we had to provide for the Appropriations Committee, but I think it would be more appropriate for us to try to do a 5-yearMr. Moss. We would prefer the 5 years.

Mr. EVANS. Fine.

Mr. CURTIS. Commissioner Evans, in testimony before this subcommittee in the last Congress, the Commission was asked to sub

mit a memorandum comparing the SEC regulatory powers compared to those of the bank authorities, and I would like to read a summary statement from the record:

Based on the foregoing analysis, it appears that the Commission has broad and effective enforcement powers available to it in registering transfer agents and related activities. Bank regulatory authorities on the other hand appear to possess powers largely through cease and desist orders under section 8 of the Federal Deposit Insurance Act which are somewhat more limited and accordingly might prove less effective in securing prompt action with respect to violations in the transfer act and related areas.

On the basis of the conclusion of the Securities and Exchange Commission in the last Congress, does the Commission remain satisfied with the delegation of enforcement authority to the bank regulatory agencies for those entities who are authorized and who are engaged in the function of a transfer agent?

Mr. EVANS. I think, in addition to our submission last year, which you properly summarized, there were submissions by the Federal Reserve Board, and Treasury, and BASIC. In their submissions they suggested-although they argued the other way that they had less authority than the SEC. They would like to have the same authority that the SEC now has in those areas.

We would certainly not oppose the granting of similar authority to the bank regulatory agencies if you were to divide enforcement responsibility in some way. We think they should have the authority.

Mr. CURTIS. As you know, the violation of the Securities and Exchange Act of 1934 exposed the violator to criminal penalties. Would you also suggest that violations of SEC registration rules applicable to transfer agents organized as banks, as well as depositors that may be organized as banks, be subject to the criminal penalty?

Mr. EVANS. In the interest of equal regulation, if we have that authority and use it for enforcement, I think they should have the same authority and should take a similar approach so that those competing institutions which are banks as well as the nonbanks in the depository system, or clearing agency system, or transfer agents, would be subject to substantially equal regulation and enforcement.

I am not sure we can get this completely, but we would like to see it as equal as possible. Lee, would you like to comment on this?

Mr. PICKARD. I would like to supplement Commissioner Evans' answer. The application of criminal penalties would depend upon a willful violation of the rules of the Commission. We wouldn't want to depart from that. But I think that the same standard of criminal applicability should apply to any persons subject to the rules and regulations of the Commission. I don't think a distinction should exist regarding these proposed amendments to the 1934 act.

Mr. CURTIS. It is a fair summary then to say that the Commission would support any amendment that would authorize a delegation of the enforcement proceedings to the bank regulatory agencies and arm them with equal regulatory authority that the Commission now possesses under the 1934 act or rules thereof?

Mr. EVANS. If Congress were to delegate any enforcement activities to bank regulatory agencies I believe they should have equal authority with regard to enforcement activities.

Mr. CURTIS. As you know, there has been a great deal of discussion in these hearings and deliberations about the ability of the SEC to

conduct on-site inspections of banks organized for the purpose of conducting clearing agency, depository, or transfer agent functions. I wonder if you could indicate what the SEC's current position iswhether you would require the right to conduct onsite inspections and call for special reports of any entity engaged in these functions whether organized as a bank or not?

Mr. EVANS. We would like that authority. In the bill which passed the other body there is some lack of clarity as to how much authority we would have. The report helps somewhat in that area because it does clarify the language of the bill to give us authority to review their operations. We ask for at least that much. That is, a minimum.

The Senate bill, however, limits that review in some respects and, frankly, we would like to have it not limited any more than absolutely necessary. We have to first check with the bank regulatory authority and we have to be sure our review has to do with rulemaking or an application for registration and not enforcement.

That does not bother us if enforcement is determined to be a part of the bank regulatory agency's function. The bill does not point out, however, that in the event the bank agency is not going to make an inspection within the necessary time frame, that we can go in on our

own.

The report, on page 18, explains that we could go in when we feel it is necessary for the establishment of rules and regulations which would apply to them, regardless of whether they give us permission or not. We can't live with any less than this, let me put it that way. The clarity of the report could be put in statutory language. We would much prefer that.

Mr. CURTIS. Commissioner, your reference to the Senate Banking, Housing and Urban Affairs Committee report, is that report on S. 2058?

Mr. EVANS. Yes, that is on page 17 and 18 of Senate Report No. 93-359.

Mr. CURTIS. In this context, I would like to read a paragraph which was contained in the House-reported bill in the last Congress, H.R. 16946, which states as follows:

In the case of a clearing agency, securities depository, or transfer agent for which the Commission is not the appropriate regulatory agency, the Commission shall rely on the appropriate regulatory agencies for the conduct of routine or periodic inspections or examinations under this section, except that, notwithstanding any provisions in this section, the Commission shall have authority to make special or other examinations and to require reports of such clearing agencies, securities depositories or transfer agents in those situations where the Commission determines that such action would be appropriate.

Can you give me the Commission's view or your view whether language of this nature would accomplish the Commission's objective as you just stated, or would you have it modified in some respects?

Mr. EVANS. I believe that language would prove very satisfactory. I would like to add that we would still intend, even if given that language, to coordinate with the bank regulatory agencies. We have no desire to duplicate their reports or inspections. We would have a different purpose, but we would intend to coordinate with them to the extent we could in order to minimize the overlap if there should be any.

Mr. PICKARD. Under the S. 2058 bill, as presently before your committee, our right of inspection is greatly limited. There must either

be a contemplated rule change or registration statement pending before us. And without getting into the question of whether we need to inspect in terms of enforcement, there may be other reasons why we would want to inspect; policymaking reasons or for the purpose of referral of proposed legislative amendments to the Congress which would cause us to want to do an inspection of these entities. Therefore, we don't think we ought to be precluded to the extent we presently are under the proposed language of S. 2058.

Mr. EVANS. I would say that we should have authority to make inspections, to the extent required, to meet our responsibilities under this section of the bill, along with the language that you have. However, I think your language is sufficiently broad that it creates no problems.

Mr. PICKARD. I would agree with that.

Mr. CURTIS. This may be an appropriate point to note, as the chairman asked me to note, that the Commission's concern of the responsibilities between the SEC and the banking regulatory agencies is not conditioned upon a limitation of this committee's jurisdiction to the extent that banks engage in the functions of securities depositories or clearing agencies or transfer agencies and supervised by the bank regulatory agency.

This committee has been assigned the responsibility to assure that bank regulatory agencies properly carry out their functions. This responsibility was assigned to it under the Securities and Exchange Act of 1934.

Mr. Moss. We want you to be very clear on that that this committee has no intention of yielding any of its jurisdiction in this area because of the nature of the entity that might perform the functions. We still have the responsibility in the securities field and we will exercise it fully.

Mr. EVANS. On the other side, the Banking Committee has jurisdiction over both securities and banking institutions, so they can balance the two. It would seem appropriate that this committee have jurisdiction over securities activities of both, so you could balance them. Mr. Moss. We don't have both, but to the extent we have one, we have it fully and will hold on to it.

Mr. WARE. If the chairman will yield?

Mr. Moss. The Chair yields.

Mr. WARE. As I recall the gentleman's statement in his testimony, you wanted the right to oversee and we certainly have that.

Mr. EVANS. We are concerned, as I said in the statement, about the division of the regulatory rulemaking authority between us and the Federal banking regulatory agencies. This can create problems. If a depository is organized as a bank, and a member of the Federal Reserve System, it must meet requirements established by the Federal Reserve Board in order to remain a member. With such authority in the Federal Reserve Act, we see no reason for authority to be granted in this legislation. If the Federal Reserve Board were to determine that safekeeping standards set by the SEC were too low, they have the authority to set higher standards and we wouldn't argue.

Mr. Moss. We can argue vigorously if we were to send staff in to check on the performance of clearing or depository functions relating

to securities if anyone attempted to close that door or bar it to this committee.

Mr. EVANS. I don't think they would, if you want my opinion.
Mr. WARE. I think there would be repercussions if they did.

Mr. CURTIS. Commissioner Evans, in a section of your statement you discuss the Commission's decision that it should have full responsibility for setting standards and insuring compliance with those standards by bank transfer agents as well as other transfer agents.

While you were willing to rely on the bank regulatory agencies for the purposes of performing the function of registration, inspection, and enforcement, the line functions, as they may be referred to. In this context, the committee in the last Congress reported a provision of the bill which stated as follows:

In the case of any disagreement between the Commission and any other appropriate regulatory agencies concerning any rule of the Commission with respect to any clearing agency, securities depository, or transfer agent, the determination of the Commission shall be definitive.

Are you prepared to give the opinion of the SEC on whether they would support that type of statutory confirmation that the SEC should be the definitive interpretive authority as to the application of its own rules, even where that application is made to bank performing this function?

Mr. EVANS. Yes. We know that such a provision is opposed by some who don't want us to have that authority. We also know why they are opposing it. We still feel one regulatory body must have the final authority. Where there are conflicts, someone must have authority to resolve them. We hope these conflicts would be minimal, however, where you have joint regulatory authority, there can be disagreements. In that event, there should be authority for some agency to bring about a resolution, therefore, we would like to have that authority.

Mr. Moss. To make that very clear, you minimize the possibility of conflicts?

Mr. EVANS. I think so.

Mr. PICKARD. I think one of the problems embodied in the Senate bill before your committee is that they divide the rulemaking authority between the Commission and the Federal bank regulatory agencies. The Commission has the authority to set the rules for operational compatibility and the prompt processing of securities transactions. The bank regulatory authorities have the responsibility to set the rules regarding adequate safeguards and security of funds. If we analyze these two areas, I think you will quickly see they are inextricably related and to try to separate the two on any given question is close to impossible.

Mr. EVANS. The Commission is not saying we think the bank agencies which may have greater expertise in these areas should be preempted from safekeeping responsibilities. If our standards in those areas were not satisfactory to them, as we stated earlier, they have plenty of authority under present law to set them higher. And we wouldn't object to higher standards being set as long as they didn't disrupt our being able to fulfill our responsibilities of assuring the development of an integrated national system for processing securities transactions with reasonable nondiscriminatory access.