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Mr. Moss. I do indeed accept that. I would merely like the record to reflect that. It would be true of me and my colleagues, we can get into areas where we are in quick and ready agreement and we can get into others where we are in vigorous and frequently enthusiastic dissent.
Mr. LANDAU. It is quite true because the larger banks belong to or have representation with a number of associations, ad hoc committees, and each group may go off, not completely on a different tangent but in a slightly different direction.
I think Mr. Bevan's point that it is a difference of degree, I think possibly the ABA recognizes that there will be legislation and it is a better approach to say, if there is going to be legislation and, in certain areas, yes, it is necessary, in other areas it may not be as necessary, but let's work for a bill which is of benefit.
Mr. Moss. You know you are running the risk of giving the House a sense of inferiority when you always appear in support of the Senate viewpoint and in opposition to the House.
Mr. LANDAU. Mr. Chairman, we apologize for that.
May I make two comments with regard to Congressman Young's questions?
Mr. Moss. Mr. Young, would you like to have his comments ?
Mr. Young. I would be happy to. I would also like to add one statement, that I commend the ABA for whatever efforts it has been taking and hopefully will take in trying to get to the ultimate objective of eliminating the stock certificate except in optional cases where it is required for one reason or another.
Mr. Moss. I think I will say that is a consensus of opinion on this committee to which I know of no exception. You may make your observations.
Mr. LANDAU. You asked what the ABA was doing to further the elimination of the stock certificate. To a large degree it's a problem of education. You are quite right, most people don't have any hesitation about leaving securities with an agent when they own mutual funds. They are very content to receive the printout or the statement monthly.
When it comes to the individual certificate, however, of a company, whether it be the pride of having a very fancy, engraved piece of paper, whether it be the fact that they or their friends may have suffered some losses during the last couple of years because the certificates were not in their hands, for whatever reason, there has not really been any help by even the Congress toward encouraging the elimination of the certificate by the individual investor as opposed to the institutional investor.
You know, it's somewhat disconcerting to find that a very distinguished Member of Congress says, "I believe that every Member of Congress should urge their constituents to get their individual stock certificates.” This is widely interpreted as being, well, it's fine for the institutions but the constituents, they ought to have the certificates. Congressmen are respected.
Mr. YOUNG. Of course one of the reasons why, under our present system, that might be motivating to get your stock certificates, is where there have been a large number of failures in securities firms and, if you get involved, you have to get involved in claiming your certifi
cates, and you run into a lot of legal problems and that is why a number of people want to get their stock certificates and have them in their own hands.
In my opinion, if it were made optional, I think there might have to be changes in State laws but, if it were made optional, I think the public would accept it just as they do the way you handle mutual funds right now.
I am not convinced we need this intermediate step. I would like to go directly to the optional stock certificate. I don't think you can eliminate the certificate, I think you have to have an optional stock certificate.
Mr. LANDAU. The ABA has for a long time pushed for a custodial type account where the investors keep their securities in a bank, we provide a service and credit their account with the interest or dividends as the case may be. Again, whether you consider this to be traditional function of banking or not, I don't know.
Mr. Young. You mean an agency account?
Mr. LANDAU. You have used the words. You know, transfer agent work isn't traditional banking. I don't know what traditional banking is. I know that the loaning of money, checking accounts—how far back do they go? I guess not very far if you go back to the money lenders of England
Mr. Moss. I think for our discussion we should stick with banking as it evolved in this country since it revolted against George III and set up a new government.
Mr. LANDAU. What I would like to say is, we hope the banking industry may continue to evolve and will not be constrained by someone saying traditionally you have not done it and therefore why should
Mr. Moss. Will the gentleman yield on that point ?
Mr. Moss. I endorse your comments with great enthusiasm and I contrast them with the testimony we have had saying, "Let us use only those traditional agencies, not traditional in the functional sense but traditional as they relate to us, those we know well, leave us with
You know, you appear, I hope, before a committee of friendly and thoughtful members of the House, who traditionally do not deal with banking. We deal with the investment banking industry. We deal with trade practices, with more regulated industries than the traditional committee of the other body on the Hill that deals with banking. It has a limited scope.
This is part of the Commerce Committee, which has jurisdiction over all regulated industry in the Nation. And so, in urging that we not be bound by the tradition of the past and that we seek new ways to better perform services, in keeping with that kind of a tradition, a tradition of flexibility of opportunity to accept and challenge and to come up with better answers, it was in that spirit that this committee drafted H.R. 5050,
I thank the gentleman for yielding.
Mr. LANDAU. I think that is quite true, Mr. Chairman. I think also that we are not really in conflict with your statement because, certainly as we are saying, the banking industry should evolve, should
you do it.
not be constrained, so the regulatory agencies that have been involved with the banking should, in turn-and will in fact, as the banks get into new adventures—continue to evolve and continue to build up their expertise rather than inject at this point a completely new entity.
Mr. Moss. That is a rather lusty youngster, it's been on the books since 1934.
Mr. LANDAU. I don't mean to impugn the agency.
Mr. Moss. Well, we are not proposing the regulation of banks. We are talking about depositories. The fact that actions to date have been taken to make the depositories banks is something that occurred not because of anything that we have done. That has been a choice of the banking people. We have not yet resolved the question as to the kind and scope of regulation which might be necessary.
I would like to go back to a comment you made, where I think you were referring to a statement by Senator Jackson in urging everyone to get their certificates. And when you say Congress really has not done anything, we did a great deal to urge people not to have to run out and get certificates. We insured their accounts, we acted to try to build a greater confidence than existed at the time of the SIPČ legislation in 1970.
We are acutely aware of the nature of your problems and of the risks involved. We have expedited this study and this series of hearings in order that we could come up not with just a single, or a part of an answer, but that we could deal comprehensively with the many problems which emerged both during the 1969 through 1971 period and which have become somewhat aggravated in recent months.
So we are concerned and we are going to move. Your views are going to be given the most careful consideration, as we have attempted to secure those views of all groups, all interested parties in this restructuring which I am pleased that your statement recognizes must be done and which the hearings of this committee clearly demonstrates must be done.
Mr. Young. I would like to close by thanking you gentlemen for appearing here today. I thank you for your views.
I would like to say either Š. 2058 or H.R. 5050 would provide the stimulous in trying to get a more efficient processing of securities which I think would help everyone. Which ever becomes law, I think they both would work.
Mr. Moss. I want to express the appreciation of the committee. We are faced with an urgent matter of legislation before the full committee scheduled to start at this hour and it will be necessary that we adjourn the hearings.
In the spirit of the cooperation you have offered to us, I am going to ask the staff to prepare any questions which it would have asked had the time allowed and that they be directed to you. I would hope that we could have responses to them as quickly as possible.
It is the desire of the committee on the conclusion of the hearings to move promptly to mark up so that we can finally make decisions on this side of the Hill and try to exercise final legislative action.
The committee will stand adjourned until 10 o'clock tomorrow.
[Whereupon, at 11:05 a.m., the subcommittee adjourned, to reconvene at 10 a.m., Friday, September 14, 1973.]
HOUSE OF REPRESENTATIVES,
Washington, D.C. The subcommittee met, pursuant to notice, at 10 a.m., Friday, September 14, 1973, in room 2322, Rayburn House Office Building, Hon. John E. Moss (chairman) presiding.
Mr. Moss. The subcommittee will come to order.
The first witness this morning will be Mr. Robert M. Gardiner, chairman of the Securities Processing Committee, accompanied by Mr. Jay L. Chalmers, chairman of the Operations Committee, Securities Industry Association.
Gentlemen, we welcome you.
STATEMENT OF ROBERT M. GARDINER, CHAIRMAN, GOVERNING
COUNCIL AND CHAIRMAN, AD HOC SECURITIES PROCESSING COMMITTEE, SECURITIES INDUSTRY ASSOCIATION; ACCOMPANIED BY JAY L. CHALMERS, CHAIRMAN, OPERATIONS COMMITTEE; AND RICHARD O. SCRIBNER, GENERAL COUNSEL Mr. GARDINER. We are glad to be here before you again, Mr. Chairman.
As you have outlined, I am Robert Gardiner. I am chairman of the Governing Council and chairman of the Ad Hoc Securities Processing Committee of the Securities Industry Association. In my professional capacity, I am president of Reynolds Securities, Inc. I am very happy to be accompanied today by Mr. Jay L. Chalmers, senior vice president of Legg, Mason & Co., Inc., in Baltimore, Md., and chairman of the SIA's Operations Committee, and on my left, Mr. Richard O. Scribner, SIA general counsel.
The SIA appreciates this opportunity to address itself on behalf of its brokerage firm members to the proposals in title IV of H.R. 5050. We support the main purpose of title IV which is to provide for the development of an integrated national system for the prompt and accurate processing and settlement of securities transactions. Attainment of that goal will serve to strengthen the performance of public securities markets.
The nature of the operational problems which were visited upon the securities business during the late 1960's has been well documented during previous hearings before this subcommittee. Our purpose today is not to add to that already extensive record. However, our testimony would be incomplete if we did not set before you our judgments as to the extent to which our industry has been successful in overcoming these difficulties. We also wish to point out why further progress and resolution of the operational challenge requires a coordinated and modern regulatory apparatus capable of overseeing a fully integrated, lower cost national securities processing network.
As SIA noted in a previous appearance before this subcommittee, the causes of the securities transaction processing problem in the late 1960's were twofold: Paper and the segmentation of the securities processing industry itself.
On the paper side, the documents and procedures in use during the 1960's were too old fashioned, too slow and too complex. They did not permit the prompt, efficient handling of the enormous upsurge in volume experienced during the bull market of the 1960's. Since the late 1960's, when the problem was first identified, the brokerage community has made significant strides forward in its capacity to process securities. Let me list just some of these improvements for you.
(1) Securities firms have upgraded significantly the caliber and capabilities of the operations work force. Between 1966 and 1971, stock exchange firms added 2.3 operations and administrative-support personnel for each new salesman. The percentage increases were 52 percent in the operational and support area versus a 37-percent gain for the sales force. Training of supervisory and clerical personnel has been upgraded markedly. Clerical turnover has been reduced from 55 percent per year and more in the 1968–70 period to under 40 percent in mid-1972.
(2) Firms have modernized operating systems through major investments in automation. A survey of seven large firms last year revealed that their computer capacity has increased by 80 percent over the level that existed in 1968. The number of programers employed by these firms, a sign of the quality of such effort, has more than doubled in the same period. Joint industry activities, such as the New York Stock Exchange's clearing facilities, the Midwest Service Bureau, and the Pacific Coast Clearing Corp. has provided expanded operational capacity for smaller firms.
(3) The industry has created a series of new centralized facilities and procedures designed to simplify the settlement of securities transactions and to immobilize stock certificates. Under that broad heading:
(a) The Depository Trust Co., formerly Central Certificate Service of the New York Stock Exchange, has reduced the physical handling of securities in transactions between brokers and is on the way to doing the same in the settlement of transactions with banks.
(b) The National Clearing Corporation, NCC, created by the NASD, is producing needed improvements in processing of over-thecounter securities.
(c) The New York and American Stock Exchanges have merged their stock clearing operations into the Securities Industry Automation Corp., SIAC, to eliminate duplication and standardize industry clearing efforts.
(d) The SIA Securities Processing Committee, made up of representatives of both national and regional firms, is at work on the goal of a single, cost effective clearing and settlement system.