Mr. CURTIS. Maybe, to state my understanding of your last comments, it would be the SEC's opinion that the rulemaking authority to establish standards with respect to the safekeeping and custody of cash and securities, these entities should be delegated to the SEC with recognition that the banking regulatory agencies may establish additional and higher standards so long as they are consistent with those which the SEC has prescribed, is that correct?

Mr. EVANS. I think that would accurately state my position and I think that would be the Commission's opinion. We do not think the legislation should restrict their present authority. There seems to be a concern that if safekeeping authority for bank regulatory authorities were not specifically granted in this legislation it would restrict present authority.

Mr. Moss. In order to have it clear on the record, it is an important question, and any restatement by Mr. Curtis should be reviewed by the Commission and if it does not have the support of the Commission, the committee will be informed.

I will ask that reservation be made in the record at this point to receive it. Is there objection?

Hearing none, the reservation is so ordered.

[The following information was supplied for the record:]

COMMISSION REVIEW OF DISCUSSION ABOUT THE DIVISION OF RULEMAKING AUTHORITY BETWEEN THE COMMISSION AND FEDERAL BANK REGULATORS

The Commission has reviewed and concurs with the discussion between Commissioner Evans and Mr. Curtis regarding the rulemaking authority of the Commission and the federal bank regulatory agencies in establishing standards concerning safekeeping and custody of cash and securities relating to clearing agencies, depositories or transfer agents organized as banks.

Mr. CURTIS. As you know, the approach the Senate has taken and that suggested in title IV of H.R. 5050 would be to require that clearing agencies and depositories which register with the Commission have rules permitting disciplinary action against the persons associated with participants in the depository or agency. That appears in the House bill, it does not appear in the Senate bill. The securities laws have depended, as you know, both in the SEC's direct enforcement of them and the power to promulgate regulations on them, depends on the ability to take disciplinary action on individual persons associated with brokers and dealers.

In that respect, does the Commission have any statement as to whether it is appropriate or not appropriate to require a disciplinary mechanism that can deal with individuals as well as corporate individuals?

Mr. EVANS. I believe the difference may be based on the difference in approach between the bank regulatory agencies and the SEC. The bank regulatory agency deals directly with banks. There is no intermediate self-regulatory body. The Commission generally deals through self-regulatory bodies and we prefer that approach.

With respect to entities which are subject to our jurisdiction under this legislation, we would want to retain that same approach, with the Commission having the authority to review what is done by the selfregulatory body. But we think the self-regulatory body should have authority to discipline both members and individuals in the first instance. Any comments, Lee?

Mr. PICKARD. NO.

Mr. CURTIS. On page 11 of your statement, you suggest that securities depositors and clearing agencies other than the Commission should solicit public comments on proposed rule changes so that they may have the benefit of such comments before they act. Can you suggest what mechanism these entities may use to assure broad public notification and participation in their rulemaking deliberations? What is contemplated?

Mr. EVANS. I will ask Lee to comment on this, but I think the way present self-regulatory bodies notify interested parties would be satisfactory. They make it as broad as possible, send it to all their members, and other interested persons and have the proposal available to anyone requesting it. I think that would be satisfactory.

If it were not and the dissemination were not wide enough, the Commission would have the authority to ask for additional comments, which we have done sometimes in the case of rule proposals made by present self-regulatory bodies, but if we felt their record was satisfactory, we would not require that. I don't know, perhaps Lee could speak better to the mechanism.

Mr. CURTIS. Maybe it would be better to have that type of comment submitted for the record, Mr. Chairman.

Mr. Moss. Without objection, the record will be held at this point to receive a more specific inquiry and the responses.

[The following material was supplied for the record:]

PROCEDURES OF CLEARING AGENCIES AND SECURITIES DEPOSITORIES FOR OBTAINING PUBLIC COMMENT ON THEIR RULE PROPOSALS

The Commission believes that it is appropriate for clearing agencies and securities depositories, rather than the Commission, to solicit public comments upon proposed rule changes. The Subcommittee has requested us to suggest a mechanism which these entities may use to assure broad public notification of and participation in the rulemaking process.

The clearing agency's or depository's procedures for soliciting public comments would be similar to those presently utilized by the NASD. Proposed rule changes would be mailed for comment to the membership of the clearing agency, the depository or any person indicating interest. A notice of the mailings would be given to the SEC. If the Commission believed that a greater public exposure was necessary under the circumstances, the Commission could require the entity to solicit additional comments by direct mailings to such other persons as the Commission deems appropriate. In these instances, the Commission could also provide the entity with mailing lists and other reasonable assistance.

In addition, after the clearing agency or securities depository had filed its rule proposal and all comments received thereon with the Commission, if the Commission deemed further public notice and comment necessary or appropriate, the Commission itself would publish the proposal for comment prior to making a determination on it.

It should be noted that we do not believe that clearing agencies or securities depositories should be required to seek public comment on all rule proposals. This matter should be left to the entity's discretion, subject to the Commission's authority to require the entity to solicit comments.

Mr. CURTIS. On page 12 of your statement, you discuss the requirement that if the Commission is not prepared to act or approve an application for registration within 60 days, it must initiate appropriate administrative action for the application, or denial of the application. You raise questions related to the intention of the committee as to the form of administrative hearing called for under that section. Can you tell us what you believe would be an appropriate administrative

hearing for the purpose of considering the denial of an application for registration?

Mr. EVANS. We would, I think, like to do it as we do in our other areas. We would not want an administrative proceeding in which there was cross-examination and this type of thing, in my opinion. I will have to call on Lee to give me some help in this area, because I am not as familiar with the legal differences between these areas as perhaps I should be.

Mr. PICKARD. I will direct myself to that. I think our concern was the timeframe in which we had to consider the decision we would come to regarding a proposed amendment to a rule of a clearing agency or depository filed with us. We thought 60 days in certain instances might not be enough time and we thought that rather than instituting a public administrative proceeding as called for by the proposed legislation, we may wish to have some other flexible tool to extend that time period in order for us to consider the merits of the proposed change.

There obviously are many situations where you must focus on the merits of a rule change, not with a view to necessarily denying the proposal, but with a view to further understanding.

For that purpose we thought we ought to have some type of mechanism for extending that period of consideration.

Mr. CURTIS. Would it be possible for you to prepare a draft mechanism which would accomplish your objectives here?

Mr. EVANS. I think so, yes.

Mr. Moss. Without objection, the record will be held at this point to receive the proposal.

[The following material was received for the record:]

INTERPRETATION OF THE TERM "PUBLIC ADMINISTRATIVE PROCEEDINGS" AS USED IN SECTION 17A (k)

Proposed Section 17A (k) provides that a pending rule change of a clearing agency or securities depository shall become effective 60 days after the Commission publishes notice of the filing unless the Commission, within that period, disapproves the proposal or extends the 60 day period for an additional 90 days. This extension is invoked by instituting what the bill terms "public administrative proceedings."

As stated in our testimony, we are not clear what the Subcommittee intended when it referred to the institution of "public administrative proceedings." The initial publication of a rule change and receipt of public comments certainly constitute "public administrative proceedings." For that reason, the reference to "public administrative proceedings" as a method of extending the time before a depository rule may become effective is somewhat confusing. We assume the Subcommittee intended that the Commission, in such cases, should obtain further opinions and views from the public, and did not envision any requirement that a formal adjudicatory-type proceeding be held in connection with such an administrative rulemaking or policy making process. Even in the context of this assumption, we expressed our feeling that the formal requirement that additional public administrative proceedings be instituted upon the lapse of a fixed time period after publication of the rule proposal could prove unduly burdensome.

The Commission concurs in what appears to be the underlying assumption of this provision-that 60 days cannot provide the Commission, in all instances, with sufficient time to consider the information and facts necessary to the Commission's analysis of a rule proposal submission.

The Subcommittee inquired what changes we would suggest in order to accomplish our objective. We believe the concept of 60-day effectiveness of such

1 While the transcript discussed the registration process, we assume the reference was intended to be to the process discussed in our testimony on page 12 regarding rule changes.

rule proposals subject to delay only where greater time for public comment appears necessary or appropriate can be preserved if the following language is substituted on proposed Section 17A (k) (2) [brackets denote deletions from the present draft of this section, italic denotes additions]:

"*** Such change, addition or amendment shall take effect sixty days after publication of such notice by the Commission, unless the Commission either (1) disapproves such change, addition, or amendment as inconsistent with the purposes of this section or otherwise inconsistent with the public interest; or (2) extends, where appropriate or necessary in the public interest or for the protection of investors, for a period not to exceed thirty days, the time within which interested persons may comment on the proposed change, addition, or amendment.

Mr. CURTIS. In your comments on the proposed amendments of section 2 of the Securities and Exchange Act regarding confidentiality of information filed with the Commission, you make the point that while such procedures may be appropriate for the filing of clearing agencies and depositories and transfer agents registered under these sections, it would not be appropriate to amend the existing mechanism to apply to all filings made under the 1934 act.

I wonder if you would be able to supply for the record an example of other filings under the 1934 act and including a rationale why this mechanism would be inappropriate for judging the confidentiality of these files?

Mr. EVANS. We will try to do that.

Mr. Moss. Without objection, the record will be held at this point to receive the material.

[The following material was supplied for the record:]

DISCUSSION OF THE COMMISSION'S CONCERN REGARDING SECTION 405 OF H.R. 5050

Section 405 of H.R. 5050, which would amend Section 24 of the Securities Exchange Act, concerned the Commission because we felt the section was too broad in scope, applying to all Exchange Act filings. The language, which originated in H.R. 14567, had been designed to apply only to the special security problems of clearing agencies, depositories, or transfer agents. We noted that the mechanism would be inappropriate for general application to 1934 Act filings and the Committee requested an illustrative example.

Existing Section 24(a), in absolute terms, denies to the Commission authority to require the revealing of trade secrets or processes. Existing Section 24(b) simply provides that any person may object to the disclosure of particular information upon any ground, and if such objection is made, the Commission is to determine whether public disclosure is nevertheless called for in the public interest. In the ordinary case of, for example, an annual report on Form 10-K, required of issuers whose securities are registered pursuant to Section 12, this procedure works out quite simply. Aside from trade secrets covered by Section 24(a), requests for confidential treatment under Section 24 (b) are uncommon. Where such requests are made on such grounds as that a particular disclosure would impair the value of a contract or would create international complications, the Commission weighs the application against the general presumption that all material information should be publicly disclosed, and arrives at a judgment. Unless the grounds stated in the application are cogent, public disclosure is usually required. This procedure has worked well.

As we pointed out in our comments, the special security problems of clearing agents, depositories and transfer agents who are required to protect property in their custody involve different considerations. Normally, in the narrow area of security precautions, confidential treatment is appropriate and should be granted, while there are few other aspects of the business of clearing agencies, depositories or transfer agents where there is any reason for confidential treatment. We believe that to attempt to combine the entirely different problems of confidentiality concerning the affairs of corporate issuers with the security problems of transfer agents and depositories produces a result which is confusing, and that a special provision such as Section 405, if adopted, should be

confined to the problem at hand, the security measures of transfer agents or depositories, leaving the general area of confidentiality in other matters to the existing provisions of Section 24.

Mr. CURTIS. Thank you.

Mr. Moss. Mr. Rowen?

Mr. ROWEN. As you know, we are in a time bind so I will try to be brief.

It appears that you will be doing a considerable amount of drafting when you get back to the Commission, and I am going to add to your burden.

On page 8 of your statement, you discuss depositories and transfer agent services. You say the bill should be modified to make clear that the combination of depository and transfer agent services in one institution is permitted. I wonder if you could submit some language in that respect to the subcommittee.

Mr. EVANS. Yes; we can.

[The following material was supplied for the record:]

DRAFT STATUTORY LANGUAGE REGARDING TRANSFER AGENT DEPOSITORIES

The Subcommittee requested that we draft language to make clear that the combination of depository and transfer agent functions in one institution is permitted. In order to accomplish this objective, we suggest that Section 3(a) (22) (B) of proposed Section 402 of Title IV be revised by deleting the period after "certificates" at line 25 of page 93 and inserting the following language: "or any person who engages on behalf of an issuer of securities, or on behalf of itself as an issuer of securities in transferring record ownership of such securities by bookkeeping entry without physical issuance of securities certificates."

We believe that it is appropriate to include such entities, commonly called transfer agent depositories (TADS), under the definition of securities depository rather than transfer agent. It seems clear that the functions performed and the safeguards needed are more akin to those of the depository.

Mr. ROWEN. On page 9 of your statement, you say, "Some of these organizations, particularly certain clearing organizations, have not been self-regulatory bodies and, under the bill, probably should not be." Could you give us an example of some of those kinds of organizations?

Mr. EVANS. A specific example that has come to my attention is Securities Processing Service, Inc. You may be familiar with that particular firm. We think this type of organization should probably not be a self-regulatory body. But we do have authority in the bill to exempt them. We are not asking for anything else. We just want to bring that to your attention so you would know that is what we would do if we felt they should not have self-regulatory powers.

Mr. PICKARD. I think the definition of depository and clearing agency would encompass TAD systems, if those systems should develop, as many of us think they might. I don't think it would be the view of the Commission that these banks in operating TAD systems should take on the aspects of a self-regulatory body, so I think that is another example and there may be others.

I think what we are concerned with is a proliferation of self-regulatory bodies over and above what any of us feel is necessary.

Mr. ROWEN. Thank you. In view of the time problems, I will forgo any further questions, Mr. Chairman.

Mr. Moss. Mr. Stern?

Mr. STERN I have only one question. Commissioner Evans, in looking over the hearings record on the Security Processing Act of last