SECURITIES EXCHANGE ACT AMENDMENTS OF 1973

THURSDAY, SEPTEMBER 13, 1973

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON COMMERCE AND FINANCE,

COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D.C.

The subcommittee met, pursuant to notice, at 10 a.m., Thursday, September 13, 1973, in room 2322, Rayburn House Office Building, Hon. John E. Moss (chairman) presiding.

Mr. Moss. The subcommittee will be in order.

This morning our witnesses, representing the American Bankers Association, are Mr. Robert I. Landau, vice president of the Bankers Trust Co., Mr. William G. Milburn, vice president of Mellon National Bank & Trust Co., Pittsburgh, Pa., and Mr. Robert L. Bevan, assistant Federal legislative counsel of the ABA.

We are pleased to welcome you and you may proceed.

STATEMENT OF ROBERT I. LANDAU, MEMBER, CORPORATE TRUST ACTIVITIES COMMITTEE, TRUST DIVISION, THE AMERICAN BANKERS ASSOCIATION; ACCOMPANIED BY WILLIAM G. MILBURN, VICE PRESIDENT, MELLON NATIONAL BANK & TRUST CO., PITTSBURGH, PA.; AND ROBERT L. BEVAN, ASSISTANT FEDERAL LEGISLATIVE COUNSEL, ABA

Mr. LANDAU. Thank you, Mr. Chairman.

My name is Robert I. Landau. I am a vice president of Bankers Trust Co., New York City, and a member of the Corporate Trust Activities Committee of the Trust Division of the American Bankers Association, I am accompanied by William G. Milburn, vice president of the Mellon National Bank and Trust Co., Pittsburgh, Pa., and Robert L. Bevan, assistant Federal legislative counsel of the ABA.

The association appreciates the opportunity to appear before the subcommittee to discuss legislation to regulate transfer agents and securities depositories. On May 7, 1973, the Association submitted to the subcommittee a detailed statement on title IV of H.R. 5050. Mr. Chairman, I request that our May 7 statement be made a part of the hearing record.

Mr. Moss. Mr. Landau, under a general reservation made at the beginning of the hearings all submitted statements are already approved for inclusion in the record.

Mr. LANDAU. Thank you, sir.

In view of this action, I will limit my comments today to a brief statement of the association's position and a discussion of certain differences between title IV of H.R. 5050 and S. 2058 recently passed by the Senate.

The American Bankers Association believes the ultimate objective in modernizing securities processing should be the elimination of the stock certificate. However, there are many obstacles to be overcome before this objective can be achieved, and it may take many, many years. As an immediate objective, the ABA supports the continued development of a national system of regional securities depositories to immobilize as many stock certificates as possible. We believe the enactment of S. 2058 as passed by the Senate would help achieve these objectives and we strongly support its final enactment. S. 2058 is much like title IV of H.R. 5050 except for the regulatory roles assigned to the SEC and the Federal banking agencies as well as a few other points upon which I will comment later.

I will discuss the regulatory jurisdiction issue first because it is our understanding that somewhat similar differences prevented action last year on legislation in this area. We hope that this issue can be resolved by this Congress.

S. 2058 as amended and recently passed by the Senate provides in our opinion a sound regulatory approach to the development and regulation of an effective securities processing system. It recognizes that various elements of our Nation's financial community converge in the processing of securities transactions. The Senate bill distributes among the concerned regulatory agencies the supervisory tasks according to their experience and expertise. Considering the job to be done and the regulatory responsibilities which will exist notwithstanding new legislation we believe S. 2058 strikes a responsible regulatory balance.

The SEC under the bill would have ultimate responsibility for and authority over the entire securities processing system. The everyday activities of transfer agents and securities depositories that are banks, however, would be supervised by the banking agencies in accordance with regulations prescribed primarily by the SEC.

In considering the issue of regulatory roles we urge the subcommittee to compare the provisions of S. 2058 with the provisions of last year's S. 3876 as well as the provisions of H.R. 5050. The Senate in S. 2058 has significantly expanded the authority of the SEC over transfer agents and depositories that are banks. It has made it clear that the SEC may use all its functions and powers to enforce compliance by any person with requirements imposed by the bill.

Now, Mr. Chairman, I would like to compare in some detail the regulatory schemes provided by H.R. 5050 and S. 2058. Under H.R. 5050, the SEC registers all transfer agents and depositories. It prescribes all rules and in this regard its authority extends to all rules that are necessary and appropriate in the public interest or for the protection of investors. Also the SEC under H.R. 5050 has the full enforcement power including the right to conduct examinations.

The banking agencies have a right to request copies of such examinations conducted by the SEC and the SEC is instructed to consult with and cooperate with the banking agencies in the conduct of its responsibilities under the bill.

Under S. 2058 the SEC registers depositories and nonbank transfer agents while the banking agencies register transfer agent banks. The SEC is authorized to prescribe for all transfer agents and securities depositories such rules as are necessary or appropriate in the public interest, for the protection of investors and to effectuate the purposes of the bill. The banking agencies have authority to prescribe for transfer agents and securities depositories that are adequate safeguarding of securities and funds. For transfer agent banks the banking agencies prescribe the records to be kept and for both transfer agents and depositories that are banks the primary enforcement responsibility, including examinations, is assigned to the banking agencies. However, as pointed out earlier the SEC may use all its functions and powers to enforce compliance by any person. Reports on examinations of securities depositories by banking agencies would be sent to the SEC and reports on examinations of transfer agent banks would be made available to the SEC. The SEC and the banking agencies are directed to consult and cooperate with each other and each must consult with and request the views of the others before proposing or adopting rules.

The ABA for several reasons believes the regulatory scheme provided for in S. 2058 more adequately serves the public interest. First, under the direction of Congress the SEC and the banking agencies have developed over the years somewhat different approaches to enforcement because of the nature of the institutions and industries under their jurisdiction. Congress has consistently recognized this distinction and in enacting securities laws of a supervisory nature it has exempted banks or granted the regulatory authority to the banking agencies. S. 2058 basically continues what we believe to be wise congressional policy. Transfer agents and securities depositories that are banks would not be exempted from SEC authority but their everyday activities would be supervised by the banking agencies under SEC prescribed rules except in the area of safekeeping of securities and funds.

The second reason for our support of the S. 2058 approach is that the banking agencies have the experience and expertise to perform the functions assigned to them. One of the most basic services provided by banks is the safekeeping of securities and funds. Securities laws like the Investment Company Act recognize this basic service of banks. We do not believe there is any logical reason for giving the SEC authority to prescribe rules in this area. Surely if anyone knows this area it is the banking agencies.

With regard to recordkeeping by transfer agent banks and their examination, the banking agencies, we feel, are more familiar with and better prepared for these tasks.

Turning to securities depositories for a minute, all three existing ones will be members of the Federal Reserve System and the Fed is uniquely qualified to examine depositories to enforce the laws and regulations applicable to them because of their experience with their book entry system for Government securities.

The third reason the Association supports S. 2058 is that the banking agencies will have to carry out most of the regulatory tasks assigned them under S. 2058 even if the SEC is specifically given this authority. The banking agencies, in meeting their responsibilities

under the banking laws, must continue examination of bank transfer agent operations and securities depositories that are banks. They will have to require transfer agents to keep certain records. They will have to assure themselves that bank transfer agents and depositories are complying with all applicable laws and regulations including those resulting from this bill. Also under the Bank Protection Act the banking agencies have specific regulatory responsibility regarding safekeeping of securities and funds. Consequently, H.R. 5050 would lead to a considerable overlap of regulatory responsibility particularly in the areas where S. 2058 assigns this task to the banking agencies. This overlap which would result from H.R. 5050 could lead to duplicate supervision and conflicting regulations.

The final reason for supporting the regulatory roles assigned by S. 2058 is that they are more apt to achieve full utilization of securities depositories. Banks owe their trust beneficiaries a fiduciary duty to safeguard their property. Should full regulatory authority over depositories be granted to the SEC as proposed by H.R. 5050, the depositories may resign their membership in the Federal Reserve System to avoid dual and possibly conflicting regulation. In this case some banks might hesitate to participate in a depository because of a lack of confidence in the operation and safety of the depository.

While on this subject of possible nonparticipation in depositories, there is one part of H.R. 5050 that will have a most discouraging effect on participation both by banks and by others. Under the House bill each depository is required to be a self-regulatory entity in that its rules must provide for disciplining participants and officers, directors, and employees of such participants. In addition, the SEC on its own initiative could reach out to officers, directors, and employees of depository participants.

It just does not seem realistic, Mr. Chairman, to believe that banks and others are readily going to subject their officers, directors, and employees to the disciplinary authority of a depository. A depository should have the power to discipline participants if they violate the rules of such depository but it should be left to the management of the participant to deal with any offending officer, director, or employee. The same is true regarding the SEC authority. It should not have the power to discipline such officers, directors, or employees of participants, for this is a management responsibility. Participation in a depository serves the trust department of a bank but it is not at all essential to the primary function of banking. Thus, these provisions of H.R. 5050 would be bound to have an adverse effect on participation. To return to the question of regulatory roles, I would like to conclude my comments by urging the subcommittee to consider what the concerned regulatory agencies can contribute to responsible regulation because of their expertise and experience. The association believes it has taken this approach in giving its support to S. 2058.

Mr. Chairman, there are a number of other points I would like to discuss very briefly.

S. 2058 authorizes a depository to condition participation upon compliance with such standards of operational capacity, financial responsibility, and business experience as the Commission finds to be necessary to assure the prompt and accurate processing of securities transactions and, importantly, the protection of investors, the de

pository and its participants. Access is essential to an effective securities processing system, but the limited grounds for denial allowed by H.R. 5050 could easily lead to a substantial disaster. Untold damage could be done by a participant lacking financial responsibility or one with criminal plans. S. 2058 would authorize the SEC to establish these additional standards by rule. A denial of participation on the grounds of such rules would be subject to the procedural safeguards of the bill as well as to agency review.

Mr. Chairman, there appeared in the Wall Street Journal yesterday, September 12, an article entitled "NASD To Propose Rules To Tighten Broker Standards." This article is right on the point we are making in that the NASD recognizes the fact that not all brokers are financially responsible or run as broker houses ought to be run for the benefit of investors as well as their own members. I would like to offer this article to you and have it made part of the record. Mr. Moss. Is there objection to the request?

Hearing none, the article will be received for the record immediately following the conclusion of your formal remarks.

Mr. LANDAU. Thank you, Mr. Chairman.

In supporting S. 2058 the association is not opposing certain provisions of title IV of H.R. 5050 for which there are no counterparts in S. 2058. Included in this category are the provisions regarding information filed with the Commission found in section 405, the requirement for a consolidation of the transfer agent function and the registrar function in a single person contained in section 406, and the lost and stolen securities/fingerprinting provisions found in section 409. We commend the subcommittee for its continued attention to the matter of securities processing. We are seeking the same goal, the development of an integrated national system for the prompt and accurate processing and settlement of securities transactions and the safeguarding of funds and securities. We urge the subcommittee to give careful attention to the regulatory scheme set forth in S. 2058 because we believe it would be the most effective in achieving this goal. Mr. Chairman, we thank the subcommittee for this opportunity to appear and offer our services to the subcommittee and its staff to help in any way we can.

[The statement of May 7, 1973, and the newspaper article referred to, follow:]

STATEMENT OF THE AMERICAN BANKERS ASSOCIATION ON TITLE IV, H.R. 5050, SUBMITTED TO THE HOUSE SUBCOMMITTEE ON COMMERCE AND FINANCE, MAY 7, 1973

The American Bankers Association has testified before the House Commerce and Finance Subcommittee on two occasions regarding securities processing and regulation of clearing agencies, depositories, and transfer agents. The Association is pleased to report that progress has been made since our last appearance toward the development of a regional depository system. Before discussing the provisions of Title IV of H.R. 5050, the Association would like to review actions of the banking and securities industries which are relevant to current legislative efforts.

Banking, because of its experience with checks, recognized the need for change in the securities handling process over a decade ago. The New York Clearing House Association established a Securities Procedure Committee to study the problem; and subsequently The American Bankers Association, after discussions with the New York Clearing House Association, established the Committee on Uniform Security Identification Procedure. The Committee was charged with developing a uniform securities identification program. The Committee, after