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Mr. WARE. Thank you.
Mr. YOUNG. You make a statement here in the first part of your presentation that the ABA believes the ultimate objective of modernizing securities processing should be the elimination of stock certificates.
What steps has the ABA taken to achieve that very desirable ultimate objective?
Mr. LANDAU. I would like to ask Mr. Milburn—who has been involved with this for a number of years—to comment on it.
Mr. MILBURN. I think we can go back as far as 1964 when the ABA originally established a CUSIP committee called the Committee on Uniform Securities Identification with the intent of being able to identify securities by a standard number throughout the country. This was an absolute necessity if we were to eliminate the certificate itself. We would have to have some way to identify by number as well as by title.
Subsequently a task force of the same committee recommended a machine-readable certificate which was a greatly reduced in size certificate which could be machine handled and we felt this was another step toward the ultimate elimination of the certificate because people get used to then handling other things than the 8 by 10 engraved certificate.
Unfortunately, or fortunately, I don't know which, when the BASIC committee was established in New York most of our research was turned over to this committee to continue the effort toward immobilization of and elimination of the certificate. I believe they do have some committees, not with BASIC any more, but perhaps with NCG, continuing to work on the problem.
What their current status is I do not know, but I can assure you the American Bankers Association has spent many dollars and much time in the last 9 years in trying to reach the goal of possibly eliminating the certificate.
I think we feel that talking about eliminating the certificate entirely is similar to talking about a checkless society. If we can eliminate certificates held in the hands of institutions, we have probably eliminated about 50 percent of the certificates in the country and about 70 percent of the activity in those certificates.
We don't think that it is politically feasible to tell the individual who likes the certificates in his safe deposit box that he cannot have them. So, I think our position is elimination of certificates among institutions and that is really the direction we are going in the elimination of certificates.
While the banking industry has not developed depositories, a major agent in Boston developed a transfer agent depository which eliminates the certificate. We are working toward it. I don't know if we will accomplish it but we are trying.
Mr. Young. You are aware how mutual funds handle the issuance or nonissuance of stock certificates, aren't you?
Mr. MILBURN. Yes.
Mr. Young. How long has this been going on in the mutual fund industry?
Mr. MILBURN. Well, I am sorry, I don't know.
Mr. Young. Has the banking industry done anything toward moving in this direction? It seems to be moving at a snail's pace. It is not makmuch progress, is it?
Mr. MILBURN. When we are talking about investors, I think when they are buying mutual funds and buying a particular security, they are looking for something entirely different in the way of a record.
If I buy a share of Gulf Oil Corp. stock, for example, I know I am going to get a nice, engraved certificate that says Gulf Oil Corp.
If I buy a share of a mutual fund, I am buying a share of many, many stocks and I can't expect to get the same kind of a record I might get in buying an individual stock.
Mr. YOUNG. That isn't correct, a mutual fund will issue a certificate if you want one. But 99 percent of the people don't want one. Isn't it true the banking industry has probably impeded the development of a faster processing system rather than helping in the development of a faster processing system!
Mr. MILBURN. I am sorry, I don't see how the banking industry has impeded. If you can clarify that, perhaps I can answer your question.
Mr. YOUNG. As I say, there is a program that has been in effect with mutual funds for over 20 years. Certainly the technology is there, why hasn't it developed for regular corporations?
Mr. MILBURN. I think you know, when you are talking about eliminating a stock certificate, you have more to contend with than just a bank. You have the regulations, for example, of the New York Stock Exchange. You have the requirements of the corporation, so, perhaps you might criticize the banks for not whipping these people in line, but I think
have to take a look at the ball of wax as a whole: Did the banks have the responsibility for initiating such action, or did someone else have the responsibility?
In effect, I am saying that, in spite of the fact that we did not have this responsibility, we took it in 1964 because nobody else would. Now maybe we are moving at a snail's pace, granted.
Mr. YOUNG. I agree the whole system is diffused. You didn't mention a couple of others, the brokers and the street-name situation is involved and nobody has acted as a catalyst to try to move this thing because there are so many interests involved. That is one reason I think Government regulation is desirable in this field and, of course, the approach we have in H.R. 5050 is to provide that catalyst because you have this rather complex diffuse for the existing situation.
Mr. MILBURN. Yes, I think you will find that we also believe, at least I personally believe, that legislation is necessary and I also believe that the proposed legislation is good.
I do think, however, that, as a banker, I do not want another level of examination and enforcement put on me and, if there are qualified bank regulatory people who can do this with the proper people making the regulation, which is the SEC—there is no dispute there--then why not let the bank regulatory people do the examination and enforcements? I have no objection at aïl to the legislation, the basis for the legislation and the need for the legislation.
Mr. YOUNG. Let me make this point. Let's discuss the point you
raise and which is discussed here. Ordinarily the transfer agent services or the registrar
agent services is in connection with handling a securities processing. That has really been a service that the banks started 30, 40, 50 years ago, I suppose, when we first had widespread stock ownership, is that correct?
Mr. MILBURN. That is correct.
Mr. Young. That really was not a banking function, it was not like borrowing or lending money, the other ordinary or normal banking functions that are performed by banks, is it?
Mr. MILBURN. You are asking me to go into the minds of the people who some years ago decided the bank's functions.
Mr. Young. It was not a traditional banking function to provide transfer agent services. That was a service that developed as an adjunct of traditional banking functions of taking deposits, lending money and managing the banks assets, is that correct?
Mr. MILBURN. I suppose I will have to agree, if I take myself back in time, to assume that is correct. I suppose that the bank was a logical place for it because of the unissued certificates that had to be kept and the issuance of dividend and that type of thing. It probably would more logically fit in a bank at that time than any other institution we might have had.
Mr. Young. The problem I am trying to bring out is this, that I think whether a bank is involved in a traditional banking function, I would agree with you very strongly that there should not be a duplicating regulatory approach to that function.
For example, we have pending before our subcommittee a bill on warranties and I intend to support an amendment to that bill which would transfer the regulation of the warranties with respect to banks to the Federal Reserve System and to the banking agencies. But that is a traditional banking function and I think, when you are talking about loans or warranties in connection with the services of a bank, which is what is involved in the rulemaking authority, but here you are not dealing with a traditional banking function, you are dealing with a service function and it seems to me the SEC should have more to do with that. I don't think the Federal Reserve System has any expertise in this at all, I think it has less than the SEC.
Mr. MILBURN. Again we are not talking about the regulation. We are talking about the examination under those regulations and the enforcement of the regulations. We do not dispute that the SEC should have regulatory authority, not at all.
Mr. YOUNG. Now a bank-well, if S. 2058, for example, were to pass, or the provisions of S. 2058 that you prefer, it recognizes, does it not, that there could be some depositories that could be nonbanking depositories and there will be some depositories which will be banking depositories, does it not?
Mr. MILBURN. If I could be philosophic on that for a moment, yes, it does.
Mr. Young. Then are you saying, if that situation develops, banks will refuse to deal with the depositories which are nonbanking denositories?
Mr. MILBURN. I would go so far as to say they may be inclined that way because again they are looking to the protection of the assets for which they have responsibility and, in looking to the protection of those assets they prefer a bank to be managing those assets, they prefer to have some representative on the Board of that bank. so that they can keep an eye on how those assets are being managed.
I think we would have very, very grave doubts about joining a depository which was not, in effect, a bank subject to examination and enforcement by banking authorities.
Certainly the banking authorities have made it very clear to us if the SEC does get the authority which H.R. 5050 gives them, they will continue to examine and set regulations for us, which again puts us under a dual examining and a dual regulatory authority which we very much object to and I think you can understand that.
Mr. Young. I don't understand it when it is not involving a straight banking function. I think you are talking here of a service function which is entirely different from banking functions. If it 'were a traditional banking function, I would agree with vou 100 percent. I am not convinced this is an area where the Federal Reserve Board has any expertise and I think the SEC would do a better job in getting the whole program moving faster than it has been moving without this authority but I appreciate your views.
I may not be--my viewpoint may not be correct.
Mr. MILBURN. One further comment, you know the Fed agencies have been examining transfer agents, for example, as part of their examination procedures for a number of years, so I would not say they lack expertise.
Mr. Young. The SEC has also been examining under the Investment Company Act. They do conduct investigations under the Investment Company Act.
Mr. MILBURN. They have not examined our banks. I doubt if they have a staff to conduct such examinations.
Mr. Young. Small Business Administration certainly comes in and checks to see if you have your small business company assets on hand, do they not?
Mr. MILBURN. I think you will find many of the Federal agencies here in Washington have some authority to examine banks. However, they can ask the Federal examiners, the Fed, the FDIC and the Comptroller to do the examinations for them and furnish copies, which they do on a regular basis. Somehow or other agencies here in Washington have worked out the system so that again we are not overloaded with examiners.
Mr. YOUNG. Couldn't that also be worked out if H.R. 5050 went through, couldn't the SEC work out a cooperative examination program with the Federal Reserve Board ?
Mr. MILBURN. One hates to bet on what might happen. One would rather be sure what is going to happen.
Mr. Young. Thank you.
Mr. Moss. The gentleman has well used his time and in no way has gone beyond any appropriate limit.
I am anxious to have some clarification, Mr. Landau. In vour concluding paragraph you indicate the feeling that there is a need for legislation and you urge upon us the pattern of the Senate rather than the proposed pattern of the House.
Mr. LANDAU. Yes, sir.
Mr. Moss. Does this reflect a difference in viewpoint on the part of the ABA as contrasted to the views of the National Coordinating Group for Comprehensive Securities Depositories and the BASIC groups
Mr. LANDAU. I am not familiar with the views of the National Coordinating Group or what they have testified to. My colleagues might
Mr. Moss. I am interested primarily in the face of the appearances yesterday before the committee-in both instances the spokesmen were officers of banks, we had Mr. Herman Bevis and we had Mr. Samuel Stewart. In their appearance and in their presentation they took the position, and I think it is best summed up in the words of Mr. Stewart, Although our group does not feel that additional legislation is needed for regulation of depositories, we welcome the continued interest,” and so on. I am interested in whether that reflects an area of disagreement within the banking community?
Mr. BEVAN. Mr. Chairman, I would say that there is a consensus in our association to support legislation and to that extent there is a difference. I would say it's a matter of degree.
Mr. Moss. The consensus to support and, in the words of Mr. Landau, a feeling that it is both desirable and necessary. In the words of Mr. Stewart, faced with horrible alternatives of H.R. 5050 or the Senate, they would accept with more enthusiasm the action of the Senate but they do not feel that anything is necessary.
Mr. Bevan. There is a difference to that extent, yes.
Mr. MILBURN. I think it is important to point out the National Coordinating Group is not a group of bankers.
Mr. Moss. No, I said I was very careful-if you were listening to what I said, that the persons appearing as spokesmen were officers of banks, Mr. Bevis
Mr. MILBURN. Mr. Bevis is not.
Mr. Moss. And Mr. Mr. Potter, he is from Sullivan & Cromwell. In any event, at least Mr. Coriaci and Mr. Stewart represent rather significant banking institutions and I just wanted to have clarification.
Mr. BEVAN. I think I should say that each of those groups testifying speak for the group as a whole and, therefore, the individual banks and their own personal view may be distinguishable.
Mr. Moss. I quite agree but I have difficulty when I am faced with articulate, able spokesmen from the American Bankers Association on one day and on the previous day I was faced with a senior vice president from one of the largest banks, Bank of America, taking a different view, so I am always interested in the extent to which there may be fragmentation of views. Is the consensus one of unanimity or are there important spokesmen who do not concur in that expressed consensus? It is for that purpose only that I make my inquiry.
Mr. LANDAU. Mr. Chairman, I think it is realistic to say, if you had five different bankers in the same room, it would take a considerable amount of effort and time to get them to agree on most matters.