the transfer agent acts as a transfer agent depository, or TAD. The Senate version of title IV of this bill specifically recognizes and endorses the transfer agent as a TAD. The transfer agent and its records are at the heart of the flow of securities. With book-share transfers by a TAD, no paper stock certificates are involved unless the shareholder insists. Transfers are executed through debit and credit entries on the transfer agent's books.

With street name and nominee name certificates, the real flesh and blood shareholders are getting more and more remote from the corporations which they own. This book-share approach to recordkeeping can assist materially in bringing the corporation and its owners together. The TAD, through subaccounting and with the cooperation of brokers and institutions, can keep the corporation advised at all times of the identity of the beneficial owners of its shares and can disseminate information to them directly.

Book-shares are not a novelty. The Federal Reserve uses a similar system for Government debt obligations. Most of the more than 8 million shareholders of mutual funds do not have certificates unless they specifically request them. Bradford estimates that over 1 million shareholders are currently availing themselves of dividend reinvestment and cash payment plans that utilize book-shares rather than certificates. This is one reason why these plans can be operated so inexpensively and accurately. DTC uses book-shares and makes bookshare transfers for brokers but not for individual investors. Securities held by brokers for customers are book-shares-except that they are on the broker's books, not the corporation's books. If transfer agents whose procedures and records meet the standards contemplated by title IV of this bill transfer shares on their records through the use of book-share entries, a vast amount of paperwork and errors and expense and delays can be eliminated.

The legislation in its present form perpetuates the preoccupation with broker-dealer settlements but does not make provision for the needs of the average individual investor in connection with such settlements. In Bradford's view, title IV should be amended in such a manner as to assure the individual investor a securities processing system offering him the same opportunities and advantages that DTC offers to the professionals.

Annexed to my statement is an appendix setting forth the language of the amendments that Bradford recommends. Simply stated, the amendments would expressly authorize a transfer agent to maintain a system to effect the transfer, loan, or pledge of securities without the physical delivery of securities certificates, by means of appropriate entries on its books. This is precisely the system now maintained by DTC for brokers and institutions. Each broker has a book-share account with DTC. As part of the settlement of a securities transaction, DTC transfers shares from one broker's account to another broker's account. Physical certificates do not change hands.

The proposed amendments are desirable because under the present state of the law and the Uniform Commercial Code it is not entirely clear that such transfers by a TAD have the same effect as transfers by a DTC. They should be made to have the same effect. It is not feasible to attempt to resolve the issue by amending the Uniform Commercial Codes of all 50 States. And a State-by-State approach is par

ticularly inappropriate here, where the goal of the legislation is "the development of an integrated national system" for securities processing.

Under the amendments that Bradford proposes the transfer agent as a TAD would provide a system similar to the DTC but for the individual shareholder. Each shareholder now has an account with the transfer agent showing the certificates in his name and the number of shares. Instead of issuing a new certificate and cancelling an old certificate each time securities are to be transferred-as is done nowthe transfer agent would simply credit one shareholder account and debit another shareholder account. No certificate would be issued unless it were requested.

For example, if the investor's holdings were in book-share form, upon their sale by him they could be transferred directly to the account of the purchaser on the transfer agent's books. In the case of settlements between brokers, shares could be transferred by book entries either directly from one broker's account to another broker's account with the transfer agent, or to and from a DTC account with the transfer agent. There would be no need for a vast paper flow into and out of jumbo certificates, with documents going through many hands and each time multiplying the opportunities for error and increasing the time and expense of a transfer.

Small investors need this service as much as the banks, brokers, and institutions. Certificates can be lost, mutilated, or stolen. The small investor cannot afford a custody account with a bank-but he could afford book-share custody account with his transfer agent. The small investor is reluctant to trust his certificates to his broker for safekeeping-but book shares with his transfer agent are safe.

Bradford does not suggest that book-share transfers by a transfer agent as TAD should be a substitute for DTC. It recommends them as a complement to DTC. The present jumbo certificates could be replaced by book-share accounts with the transfer agent in the name of DTC. Broker-dealer settlements would continue to be made by DTC as in the past. The only difference is that the flow of certificates to and from DTC and the transfer agents would cease. In any transaction involving an individual investor-which is to say in most transactions the TAD will make the DTC more effective.

Bradford's proposed amendments do not require transfer agents to effect securities transfers through book-share recordkeeping. They only permit them to do this. The proposed amendments do not legislate the elimination of the stock certificate-they merely establish the machinery for their eventual elimination, and meanwhile any shareholder who wants a stock certificate will get it.

Bradford feels that future securities processing should not be structured in such a way as to confine it to the hands of a few major institutions. The average investor should not be saddled with the all or nothing risks of a single clearing or depository system. When such a monopolistic system made a mistake, it would have to be a beauty. Furthermore, no DTC is in a position to open upwards of 80 million accounts. for individual investors. Transfer agents have these accounts open now. The path should be kept clear for all the benefits that traditionally flow from spirited competition.

Some interests in securities processing activities are looking in the other direction. They contemplate at most one depository or DTC in

each region of the United States, a DTC which would be free from concern for competitive pressures. The individual shareholder, as well as brokers and institutions would be stuck with the one DTC in his region-however expensive or inefficient-because it would be the only game in town. No competitive stimulus would exist with regard to the efficiency of the DTC, the fees it charged, or equality of access for all qualified applicants problems which regulators dealing with depositories have recognized-as have regulators dealing with postal service and the telephone company. And with only one DTC per region, the value of the securities in its custody would be astronomical. One depository already holds securities of a value in excess of $50 billion-and has total insurance coverage for theft, errors, and the like of less than one-tenth of 1 percent of that amount. Its fees are heavily weighted against the individual shareholder and it does not contemplate having any competition.

To some extent the obvious problems and risks in this would-be monopoly area can be balanced and countered by encouraging the formation of depositories such as the TAD, which are geared toward the smaller shareholder. These can be a part of and can interface with a national securities processing system. However, in Bradford's view the problems of monopoly are best resolved by competition. This legislation should encourage the formation of additional well-regulated depositories in each region, including depositories organized by banktransfer agents which share or will share ownership of existing depositories. The existence of this competition will both benefit the investing public and give the regulatory authorities a yardstick by which to measure performance and establish standards.

I appreciate the opportunity to appear here and present Bradford's views on this legislation.

Mr. Moss. Without objection, at this point in the record the proposed amendments to title IV included as an appendix to the statement will be included in the record.

[The amendments referred to follow :]

APPENDIX

PROPOSED AMENDMENTS TO TITLE IV OF H.R. 5050

Delete "or" in line 9 of page 77. Delete period after "securities" in line 10 of page 77 and insert: "or (E) the transfer, by bookkeeping entry without physical issuance of securities certificates, of record ownership of such securities." Insert after Section 17A (r), line 7 of page 96, the following new subsection: "(s) Any transfer agent registered in accordance with this section 17A shall, subject to such rules and regulations as the Commission may prescribed as necessary or appropriate, have the right and power to maintain a system either directly or through one or more affiliates to effect the transfer, loan or pledge of securities without the physical delivery of securities certificates, by means of appropriate entries on its books, and any such transfer, loan or pledge shall have the same legal force and effect as if the same were effected by physical delivery of securities certificates."

Mr. Moss. Mr. Ware?

Mr. WARE. In view of the time limitations, just one question at the moment, it may or not be directly related. You referred to the "less than 10-percent insurance coverage in a particular situation." Are you suggesting that the legislation, H.R. 5050, should include anything with respect to insurance coverage?

Mr. DEL COL. No; I assume that the SEC would act with respect to that.

Mr. WARE. Thank you, Mr. Chairman.

Mr. Moss. Mr. Eckhardt?

Mr. ECKHARDT. I have no questions, thank you, Mr. Chairman.
Mr. Moss. Mr. Breckinridge?

Mr. BRECKINRIDGE. Thank you, Mr. Chairman.

Mr. Del Col, would it be possible to estimate in any way the individual savings to an investor that would result from your proposal, which I understand would be entirely permissive and in no way mandatory?

Mr. DEL COL. Yes; we have recently done a mailing to National Steel shareholders on a trial basis to see how many would like to deposit their stock with Bradford in the form of a custodial arrangement and our charges to the shareholder would be in the order of $3 per year.

The cost that we have compared this to in terms of replacement of a lost certificate, for instance, would cost them, how much, about $76? Mr. MCKAY. Yes; it would cost $76.

Mr. DEL COL. Which is 3 percent of the market value.

Mr. MCKAY. With a safe deposit box, the annual expenses are between $7 and $10. Again, this is a method which is less expensive.

Mr. DEL COL. We think it is quite reasonable. If more and more participants take part, as in the case of the mutual fund industry, you will find it is cheaper not to issue certificates than it is to issue certificates. So the surcharge will be reversed, the person depositing his certificates with the transfer agent will pay less, and the person requesting a certificate will probably have to pay a premium.

Mr. BRECKINRIDGE. Thank you.

Mr. Moss. I want to say that I think your proposal is deserving of the most careful consideration by the members of this committee and I am confident it will be given that kind of consideration.

Mr. Curtis?

Mr. CURTIS. Only one question I hope can be clarified. Is it your opinion that there is anything in title IV of H.R. 5050 which precludes the participation of the TAD's?

Mr. DEL COL. We don't feel there is anything that precludes participation of TAD's but we feel by lack of mention of TAD's, it might be claimed that the legislation did not contemplate TAD's in the future.

Mr. CURTIS. The purpose of your proposed amendments then is to give specific statutory recognition to this form of transfer agent and depository as an appropriate method for the clearance and handling the problems of transfer, clearance, and settlement securities transactions?

Mr. DEL COL. That is correct.

Mr. CURTIS. Doesn't it also have the effect of working an indirect preemption of inconsistent provisions of the Uniform Commercial Code?

Mr. YOUNG. The Uniform Commercial Code provisions are not inconsistent with this, they just don't go this far. They talk about a TADtype transfer by a depository trust company and that type of animal, but not by a bank transfer agent. They don't preclude them, they just don't discuss them.

Mr. CURTIS. You propose a new subsection (s) to be added after section A (r). Would not, in your opinion, this resolve possible conflicts we might now have with State authority? Is that what you are aware of?

Mr. DEL COL. I believe that is correct.

Mr. CURTIS. Thank you.

Mr. Moss. Mr. Rowen?

Mr. ROWEN. No questions.

Mr. Moss. Mr. Stern?

Mr. STERN. No questions, Mr. Chairman.

Mr. Moss. The Chair wants to thank you for your appearance. We will now adjourn until 10 a.m. tomorrow.

[Whereupon, at 11:30 a.m., the subcommittee adjourned, to reconvene at 10 a.m., Wednesday, September 12, 1973.]