Regional brokers and banks outside New York, San Francisco and Chicago are linking up with the depositories in those cities or making plans or inquiries as to doing so. NCG would encourage others to join the nationwide network. The financial communities of Boston and Hartford are studying the desirability of establishing their own depositories instead of linking up directly with DTC. Other areas of progress include scheduled DTC interface with the Pacific and National Clearing Corporations and existing DTC relationships with the clearing corporations of the Midwest, PBW, Boston and Detroit Stock Exchanges. Banks in Richmond, Dallas, Hartford, Boston, Minneapolis and Atlanta are now operating on a trial basis as depository facilities for DTC, a program which allows participants to deposit securities in DTC at regional locations and to receive prompt credit in DTC records. Further, steps are nearing completion to provide for the regulation of depositories by appropriate authorities—under the existing regulatory relationships. The New York Superintendent of Banks and Banking Board have approved the organization certificate of DTC. The application by DTC for membership in the Federal Reserve System was approved on April 19, 1973 and will become effective upon DTC becoming operational as a New York State limited purpose trust company. It is expected that this will occur when the SEC approves the rules which DTC has filed with it. Work is in progress toward chartering a depository as a trust company in Illinois. The SEC has acted favorably on the rules of the proposed trust company to be called the Midwest Securities Trust Company. The California Superintendent of Banks has approved a proposal to charter a depository as a trust company in that state. DTC's board of directors* will include its Chairman and President, representatives from the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., brokerage firms, banks, an investment company and an insurance company. It is evident from the foregoing that enormous progress has been made to date in the development of depositories and that substantial further progress is imminent—all without new federal legislation. Existing bank regulatory authority has been enlisted to assure the quality of depository inspections and supervision. Coordination of depository development by the SEC has been afforded by that agency's review of depository certificates of incorporation, by-laws, and rules. Full Development of Depositories Requires Primary Regu lation be Vested in Banking Authorities Although there has been a great deal of progress, the depositories in California, Chicago, and New York continue to serve chiefly brokers and dealers. While some commercial banks are receiving pledges of securities for broker/dealer loans through DTC and some have begun to deposit securities held as custodians, they have not deposited shares they hold in their trust departments as fiduciaries. In order to eliminate physical deliveries as a significant factor in the processing of securities transactions, depositories must attract institutional investors, including fiduciaries, banks, trust companies, insurance companies and mutual funds. These institutions and their customers presently account for about 60% of total public trading volume in shares on the New York Stock Exchange. A study in New York City indicated that, for every $2 in The following are members of the Board of Directors of DTC: William T. Dentzer, Jr., Chairman-formerly Superintendent of Banks, New York State; Diran M. Kaloostian, President; Elliott Averett, President, The Bank of New York; R. Manning Brown, Jr., Chairman, New York Life Insurance Company; Hamer H. Budge, President, Investors Group of Companies-formerly Chairman, Securities and Exchange Commission; Samuel A. Gay, Senior Vice President, New York Stock Exchange, Inc.; David H. Morgan, President, National Clearing Corporation, a subsidiary of the National Association of Securities Dealers, Inc.; James J. Needham, Chairman, New York Stock Exchange, Inc.; Francis J. Palamara, Executive Vice President, New York Stock Exchange, Inc.; William I. Spencer, President, First National City Bank; Walter F. Thomas, Vice Chairman, Manufacturers Hanover Trust Company. Robert C. Van Tuyl, Vice Chairman and Governor, American Stock Exchange, Chairman, Shearson, Hammill & Co. Inc. and George E. Doty, Partner, Goldman, Sachs & Co. have been proposed for board membership. value of securities held by brokers, the banks held $3. However, New York is unusual in that multi-state brokerage firms tend to keep all or almost all their securities holdings in New York. An estimate recently prepared in California showed that Western banks held $30 billion worth of securities while Western broker/dealers held $4 billion. Another reason why securities held by banks as fiduciaries must be attracted to depositories is that transactions involving banks largely consist of deliveries to and from banks on a cash-on-delivery or COD basis—the most troublesome, paper-intensive, and costly of all types of transactions. Clearly, bank participation in depositories is essential if stock certificates are to be substantially further immobilized and the paperwork involved in the processing of securities transactions is to be cut to a minimum. Banks are reluctant to give up physical possession of securities they now hold because they are charged with a high degree of responsibility for the safekeeping of assets belonging to others. Recent failures of some firms to safeguard other peoples' securities confirm the wisdom of banks' continuing to require the exercise of prudence and serve to remind them and their customers of risks involved in placing securities in the hands of persons not subject to the experienced regulation and examination of a banking authority. Thus, to attract securities held by banks, the regulatory atmosphere surrounding depositories must satisfy their strong and legally-imposed sense of fiduciary responsibility and extend the present form of examination and regulation to which their safekeeping functions are subject to the new holder of the certificates. Institutions and individuals using banks and trust companies as fiduciaries and to process securities transactions do so in reliance, among other things, on fiduciary responsibility and banking agency supervision. Banks will not—and should not be expected to-lightly give up to depositories the physical possession of securities for which they are responsible and which have market values ranging from hundreds of millions to billions of dollars. Insurance companies and mutual funds can be expected to take a similar view. Moreover most banks could not, even if they wished, give up possession of a large portion of the securities they hold as fiduciaries because of restrictions in the trust and estate laws of most states. Those laws must be changed before they can do so. Legislators and bar associations traditionally have been reluctant to advocate such change. In New York, California, Connecticut, Georgia, Illinois, Maine, Maryland, New Mexico, Virginia and Washington such laws have been changed so that a securities depository can now receive deposits of fiduciary securities from banks in these states, in each case with the expectation that depositories would be subject to banking-type regulation. To repeat, the main effort is to attract securities held by the remainder of the financial community under a common depository roof with those held by broker/dealers. The question is what type of regulation will best encourage the deposit of securities by institutions, assure reasonable access to potential users, and promote compatibility among depositories so as to provide a nationwide system for book-entry transfer of securities. The characteristics and the ultimate success of depositories will be shaped by the nature of the regulators. BASIC believes strongly that depositories must have the qualities and attributes of banks. If we are to achieve this objective, banking authorities, including the Federal Reserve System, must play a major regulatory role. At the same time, we believe that the SEC can effectively discharge its responsibilities in connection with a national system for processing securities transactions by working with depositories on the formulation of their charters, by-laws and rules, as it has in the past. The Federal Reserve System and Other Banking Authorities Although no regulatory agency can claim actual experience in regulating or examining securities depositories as such, the Federal Reserve System and other banking authorities have for many years examined banks and trust companies that hold securities for others, receiving them, keeping them, presenting them for transfer, delivering them out upon customer's instructions and collecting and crediting dividends and interest. If one disregards the power to effect securities transfers by book-entry, such banks and trust companies are close to being securities depositories in that they carry out the essence of a depository's custodial functions and procedures. The Capabilities of Bank Authorities to Examine The banking authorities have ample capability to supervise banks, trust companies and limited-purpose trust companies functioning as depositories. For example, as of year-end 1972, the Federal Reserve System shared responsibility for the examination and regulation of 1,092 state member banks and had approximately 535 full-time examiners. And on the state level the New York State Banking Department as of year-end 1972 was responsible for the examination and state regulation of 500 commercial banks, savings banks, savings and loan associations, credit unions, trust companies and banking agencies, of which 70 were members of the Federal Reserve. The Department then had 286 full-time examiners. In examining banks, the Federal Reserve and other bank regulatory authorities address themselves to the following, among other areas: Organization Structure Management policies and deviations therefrom, if any Committees and their functions Minutes of the board of directors and committees Financial Soundness Capital structure; withdrawal of capital Earnings and expenses Dividend payments versus restrictions Adequacy of insurance and review thereof by the board of directors Contingent liabilities; repurchase agreements; accounts receivable and payable; suspense accounts and overdrafts Uncompleted purchases and sales Litigation |