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it but token depositories from banks. It not only has a trust company charter but has become a member of the Federal Reserve.
In Chicago, Mr. Coriaci could tell you they, after incorporating their depository, which is operating as a trust company, have applied or will apply to the Federal Reserve Board for membership.
The Pacific coast also has a depository, which is operating, which has received an approval subject to completion of certain formalities that it become a trust company and it plans, I believe, to also apply for membership in the Federal Reserve. So, in the three areas which are the principal areas, a great deal of progress has been made.
Mr. STEWART. If I might add to that, in our Pacific securities depository as now functioning, there are 10 banks in the West which are actively participating in it as to collateral loans. None have yet or feel they can yet deposit fiduciary securities in it.
Mr. GOLDWATER. Is this because of State law?
Mr. GOLDWATER. Do you find a willingness to do this if the law is changed?
Mr. STEWART. Yes, I have been assured by people running our trust department that they are prepared to go into it and I have been assured by other member banks who are members of our policy group, that they are prepared to go into it.
Mr. GOLDWATER. Of course, if the law is changed, is it not up to the discretion of the customer as to where he wants his securities?
Mr. Stewart. This is correct, particularly as to those large pension fund corporations, which as I mentioned a while ago, send their own people out to check on physical custody, we will have to do a selling job on them, but, regardless of what the law is, that selling job will have to be done.
Mr. GOLDWATER. Therefore, if a bank was to deposit, it would be a simple procedure; a matter of running down a computer print ?
Mr. STEWART. We expect it would save us a great deal of time and trouble if the depository could become effective for, as we envision a depository, 75 or 80 percent of the securities.
Mr. GOLDWATER. You talk about the numbering system, is that in effect or is it still being developed ?
Mr. CORIACI. Our working committee had a meeting on the 24th of August relative to the system and they are close to finalizing the details of the numbering system. You have preliminaries of that system, they were submitted with the prepared statement. We hope by the end of this month we will have the details finalized that will be used by the depositories and the institutions participating with the depositories. We will then proceed with endorsement of that numbering system.
Mr. GOLDWATER. So, in other words, for this regional system to work you have to have a numbering system, and I assume you have to have some sort of bonding or insurance in effect also ?
Mr. CORIACI. We feel the numbering system will facilitate interface between computer systems and standardizing formats across the country. We can continue to operate as we are today but with the volumes we anticipate for the future, if we can call a firm by the same designation across the country, much as we have done with the CUSIP numbering system in identifying securities, we will eliminate a lot of errors in identification, particularly with firms with a lot of offices across the country. So where we can standardize, we eliminate the possibility of error creeping into the system.
If I may elaborate on the Midwest a moment, your question on participation is a very perceptive one. The banks have moved very slowly into participation in our depository. We are concerned, as I think Mr. Bevis said quite some time ago, depositories looking and feeling and smelling and everything else like a bank. We have a deep concern for our customers and their participation in a depository, and whether or not they permit us to put their securities in a depository.
Our State laws have been changed in Illinois and we are presently working with three working committees with our Midwest trust company. The first question deals with the question you raised, which accounts and which customers can participate, the second dealing with the audit and security requirements, and the third, the operation requirements for participating with that depository. We are dealing with those three at the outset. The banks have committed up to a million dollars in the next 12 months to facilitate implementation between the banks and MSTC.
Mr. GOLDWATER. It appears you would need common procedures in law and regulations for it to proceed, and enforcement of these procedures. I understand it is your opinion that this should come from the banking industry?
Mr. CORIACI. Yes. As you undoubtedly know, the banks are in effect depositories today. We serve as safekeeping agencies for a number of our customers, we act as safekeeping agents for a number of smaller banks that do not have facilities in their own shops and we feel we have expertise in this area to begin with.
We also know the bank regulatory agencies have supervised and reviewed us time and again and we are used to that type of supervision and we feel the record pretty well speaks for itself in the bank as far as the result of those examinations, so we are comfortable with that type of regulation and know our customers are comfortable with that type of regulation.
Mr. GOLDWATER. Where do you see the SEC in this type of thing?
Mr. CORIACI. I believe, as $. 2058 is written and our group has endorsed that particular bill, we feel that since participation in a depository will be beyond just the banks, it is open to the financial community, certainly the brokers who fall under the SEC, certainly the SEC should get involved in the rulemaking and we are dealing with securities where the SEC has an interest.
Mr. STEWART. I am not sure whether my answer about the willingness of the banks in the Midwest will participate, that is on the assump: tion that the requirements set up will be those that they can feel comfortable with. I think I should put that in as a qualification in my comments on the intention of the banks. They are not in any straitjacket that it has to be in a certain way but I think they would view with some misgiving a turnover of the bank regulatory function to the SEC.
Mr. GOLDWATER. One last question. Are these depositories public corporations, like the Depository Trust Co.?
Mr. Bevis. No, Mr. Goldwater, Depository Trust Co., at the moment, is a wholly owned subsidiary of the New York Stock Exchange and it must continue to be so until the uniform code having to do with ownership of depositories is amended in enough States to permit wider ownership.
The plan of Depository Trust is that, as soon as the ownership can be broadened, the stock will be made available to the participants of the depository and generally in proportion to their use of the depository so that it would become a mutual service organization, in effect. There is no plan for outside, nonuser ownership.
As a matter of policy the Board of DTC up to now has indicated that it will be essentially a break-even organization except for a modest dividend on the rather small amount of capital stock that would be outstanding. Mr. Potter may wish to add about the changing of the uniform code to permit this broader ownership. This has been a big effort on the part of BASIC.
Mr. POTTER. As originally enacted, the code authorized book entry transfer of securities by what was defined as a clearing corporation. The clearing corporation, in turn, was defined as a company all of whose stock
was owned by or on behalf of a national stock exchange or a registered association such as the NASD. The effort that BASIC has been making is to permit a broader ownership so that the concept of user-ownership of depositories can be implemented and 29 States have passed legislation that would permit that and those 29 States, in effect, pertain to more than 70 percent of the shares traded on the American Stock Exchange and the New York Stock Exchange. A great deal of progress has been made and it is going along well.
Mr. GOLDWATER. Is it possible for this regional system to also be what is called the clearing system?
Mr. BEVIS. One has to define his terms, Mr. Goldwater, I would respond to that by defining a clearing system as one that captures trades made by two parties on an exchange or over-the-counter, compares them, gets agreement between the two parties that they do have a transaction, nets them down and either provides a settlement facility, or tells the parties the amount of settlement to be made some other place and what delivery is to be made some other place.
It is possible for a depository to do all of those things. If it should do all of those things that I have described, it would look and act less and less like a bank and I should think might run into some difficulty as to getting a bank charter.
Moreover, it gets involved in a highly diverse set of participants with widely varying needs and would become an operation so complex that it might frighten many people as to whether it could keep abreast of hectic trading.
Mr. GOLDWATER. It is your opinion the function should be kept separate?
Mr. Bevis. It is my opinion that a depository should have the functions of custody, receive, deliver, book entry transfer of securities, cash settlements if the participants wish, as well as the pledging of collateral for loans by book entry, and held to those functions. Mr. GOLDWATER. Thank
Mr. Chairman. Mr. Moss. Mr. Curtis ?
Mr. CURTIS. Mr. Bevis, I would like to explore one point which I think might delineate a position you have expressed on behalf of BASIC and that expressed by Mr. Stewart on behalf of the National
Coordinating Group, that is, in Mr. Stewart's statement on page 3, he lists criteria which he believes are acceptable to the National Coordinating Group if incorporated in Federal legislation. These would be mandatory consultation, delegation of sole rulemaking authority with respect to safeguards to the bank regulatory agencies and to deal great principal endorsement responsibility and supervision responsibility to the bank regulatory agencies for entities organized as banks.
Mr. Stewart, you do not also in that statement ask that the Federal-excuse me, you do not ask that the SEC's rulemaking authority be continued by the necessity of maintaining concurrence of the Fed in any rule which may be applicable to banks engaged in these functions.
Mr. Bevis, you stressed that necessity in your statement. Is this, in fact, a difference between your positions?
Mr. STEWART. I don't think it is a fundamental difference, I regard the concurrence as very desirable and to me an almost necessary byproduct of the mandatory consultation. Mr. Curtis. Would mandatory consultation by itself be acceptable? Mr. Bevis. With the SEC having the final say y?
Mr. CURTIS. For those rulemaking areas which have been assigned to it in legislation.
Mr. Bevis. First, on the potential difference, I don't think there is one. In endorsing S. 2058, in effect I thought, and perhaps I was speaking in shorthand, that I was endorsing what Mr. Stewart enumerated.
I commented on the Federal Reserve Board's request for the right to concur in terms of its being another approach at compromising which would give the SEC the overall first look at everything having to do with the Nation's securities transaction problems but would give the bank authority the right of review and a requirement of concurrence with regard to the limited area in which they operated. In my field of interest this would be bank depositories.
Mr. CURTIS. Let me restate, I hope fairly, that with respect to bank depositories you recommend a mechanism that would require Fed or bank regulatory agencies' concurrence of any rulemaking of the SEC which is applicable to banks engaged in this function, is that correct?
Mr. Bevis. I would like to see that as a general proposition. The Senate bill gives the Fed, in the case of depositories, rulemaking authority with regard to only part of the whole rulemaking field, namely, in connection with safeguards of securities and funds. That, from the standpoint of developing confidence in depositories, is the most significant area for a bank authority to be in.
I think that would be workable instead of this overall concurrence. I think the division in the Senate bill would be workable from the standpoint of instilling the necessary confidence in depositories that we need in order to develop them.
Mr. Curtis. Mr. Bevis, in your statement you set out some examples which I believe in any case very illustrate the interrelationship of the issue of safeguarding and safekeeping with those other aspects of tieing together a nationwide system of clearing and settling securities.
Would it be correct, if the bank regulatory agencies, most specifically the Fed, were given sole authority with respect to safekeeping,
that this authority would be the overriding principal or could be exercised, or you would expect it to be exercised in a manner to override security policies with respect to various phases of the system and other practices of the system?
Mr. Bevis. I would answer that question, Mr. Curtis, this way: Resolution of issues such as I have opposed hypothetically would not be easy. But if there were a choice between let us say, moving fast and far to try to expand a modern securities processing system, that choice on the one hand versus running serious risk of loss of securities or funds, I would think the latter would have to prevail without any question. Otherwise, I am afraid the whole depository system would lose the confidence of its participants.
Mr. POTTER. This is essentially where S. 2058 comes out because it provides that the banking authority makes the rule with respect to safeguards. The safety first feature is built into that bill as it stands and, quite frankly, that is what we would like to persuade you on this committee to accept as a point of departure.
Mr. CURTIS. What I am trying to make clear for the record is your opinion that, in so doing, the bank regulatory agency would be in a position of controlling all aspects of the operation of that depository because it is your argument that all aspects of its operation relate to the safety first issue.
Mr. POTTER. I don't believe that is a correct reading of Mr. Bevis' statement or the colloquy here today.
The only point at which a control by the bank authority would be imposed would be in those situations where the two agencies were unable to resolve, after consultation, a difference that centered on what the Federal Reserve Board considered to be an issue of safeguards. It is only in that aspect.
Mr. Moss. For the record, we should hear from Mr. Bevis now as to whether he concurs. The Chair would like to caution that, in keeping with the customs of the committees of Congress, the Chair is required to safeguard the rights of members to prevent interruption. He reserves the right to preserve the same privilege for the witness. Interruption should be upon a yielding, after first getting attention. It should not be a summary action by any member of the panel directed against another member of the panel.
Mr. POTTER. Excuse me, I didn't mean to step across Mr. Bevis' testimony.
Mr. Moss. I recognize that but the effect was precisely that and it continued to be. The Chair overlooked the first instance, it must not overlook the second.
Mr. BEVIS. Mr. Chairman, I concur in Mr. Potter's remarks. I think it is too broad a generalization to say that he who watches after the safeguarding of securities and funds would thereby have jurisdiction over all a depository's operations, its character, and so forth. Issue by issue the matter could come up but I think it is too broad a generalization to say that covers everything.
Mr. CURTIS. But there are significant aspects of the operation of a depository which are interrelated with the issue of safekeeping, is that correct?
I hope you understand I am not quarreling with your position, I am trying to identify the primacy of the safekeeping issue and what