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If New Legislation Regulating Depositories is Decided Upon,
it Should Follow the Lines of BASIC's Draft Bill
BASIC believes that the following regulatory pattern, exemplified in the draft bill attached, would provide a reasonable compromise among appropriate regulatory objectives-if additional or new legislation is decided upon.
All depositories would register with the SEC, in accordance with rules prescribed by it. The SEC would grant, or deny or permit withdrawal from, registration.
Rules and Regulation
The SEC and the Federal Reserve System would be required to consult and cooperate with each other on all rules, regulations, and orders involving depositories, their participants and eligible securities to the end that rules and regulations applicable to securities depositories would be in accord with both sound fiduciary practices and a sound system for prompt and accurate processing and settlement of securities transactions. Thus, the SEC would not have to coordinate or have direct relations with a variety of Federal and State agencies. State bank-chartered depositories that are members of the Federal Reserve System would be subject to regulation by the Federal Reserve System (the only federal bank regulatory agency to be involved).
Depositories would originate their own rules, subject to regulatory agency review; the Federal Reserve System or the SEC could initiate rules in their respective spheres of jurisdiction.
Non-bank depositories would be regulated solely by the SEC.
The following table sets forth a division of Federal jurisdiction between the SEC and the Federal Reserve System which, BASIC believes, reflects the needs of the regulatory agencies, investors, depositories and depository participants:
Depository's registration and rules
In essence we seek:
1. High standards, which are the obligations of a fiduciary, for the safe and efficient operation of depositories.
2. A depository system subject to experienced bank regulatory agency examination at least as thorough as that provided by present bank regulatory procedures.
3. Encouragement of public confidence in depositories. *
Enactment of a regulatory law will not by itself eliminate the preparation or movement of a single piece of paper or immobilize a single certificate, since a regulatory agency does not operate the system that creates or solves the paperwork problem. Improvements will come from the daily work of all those actually involved in processing securities' transactions. It has become clear to BASIC and others that the required magnitude of improvements can be obtained only if depository coverage can extend beyond the securities industry so as to include the entire financial community, and this will be accomplished only if an appropriate regulatory climate is created.
* The subcommittee recognizes the all-important element of confidence especially in connection with the eventual elimination of certificates in its Report, op. cit., page 72: “It is therefore essential to develop a system that merits public confidence. Such a system should provide sufficient checks and balances to assure its reliability.”
The best way to accomplish this is with bank-chartered depositories that look, act and are regulated like banks.
Depositories can be further successfully developed without new legislation. If there is to be new legislation, however, we do not believe that H.R. 5050 is suitable. In the draft bill attached, we have tried to work out an appropriate regulatory climate by providing that depositories be under the prime supervision and regulation of banking authorities but also by providing for the SEC's general responsibilities for securities transactions by its participation in depository registration, rulemaking and discipline.
We invite your favorable consideration of the approach we present to you.
BANKING AND SECURITIES
May 11, 1973
John M. Meyer, Jr.
BANKING AND SECURITIES INDUSTRY COMMITTEE
SUPPLEMENT TO MEMORANDUM OF COMMENT
DATED MAY 11, 1973
On pages 3-6, inclusive, of the Memorandum of Comment dated May 11, 1973, there were cited past and prospective developments to demonstrate depository progress under existing regulatory legislation.
In the ensuing four months, there has been further progress, notably:
-DTC, the New York limited purpose trust company, took over
the operations of CCS, Inc. on May 11, 1973 (this was reported as in prospect in the Memorandum). - The number of issues on deposit in DTC increased from 2,881
on February 28, 1973 to 3,603 on July 31, 1973. -SEC has cleared the rules of DTC. - Membership of DTC in the Federal Reserve System has become
operations on June 11, 1973 as an Illinois trust company.
Director, Kidder, Peabody & Co., Incorporated.
principle to participate in the development of the Pacific Securities Depository and to collectively contribute $2.26 million.
August 21, 1973
The following is the text of a bill which the Banking and Securities Industry Committee (“BASIC”) proposes as a model, on the assumption that consideration will be given to federal legislation for regulation of depositories.
To foster improvement in the processing of securities transactions
by increased immobilization of certificates in privately owned and operated securities depositories.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. This Act may be cited as the “Securities Depository Act of 1973."
SECTION 2. For the purposes of this Act:
A. The term "securities depository" means any person who acts as a custodian of securities in accordance with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by book-entry without physical delivery of securities certificates, or which otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates.
The term “securities depository” shall not include (a) Federal Reserve Banks, Federal Home Loan Banks, Federal Land Banks, or any person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States, (b) banks, brokers, life insurance companies or their registered separate accounts, registered open end investment companies or unit investment trusts, building and loan, savings and loan, and homestead associations, and cooperative banks by reason of the lending, fiduciary,