Delivery of securities to financial institutions via National Clearing Corporation Continuous-net-settlement service

Margin clearing accounts

Locked-in-trades

Transfer Agency Depository (TAD)

Free stock transfer service

Facility management for National Clearing Corporation (NCC)

Institutional clearing programs

Daily mark-to-the-market

Securities and Exchange Commission (SEC)

Rule 17a-13

Require mandatory quarterly count of all securities held in physical possession and the mandatory quarterly verification of all securities in:

(a) transfer

(b) in transit
(c) borrowed
(d) pledged

(e) deposited

(f) fail to receive

(g) fail to deliver

Rule 15c3-3

(1) Requires cash reserve formula.

(2) Requirement to obtain possession of securities sold for a customer within 10 business days after settlement date.

(3) Mandatory buy-in of short securities differences with 45 days after count of verification.

Securities Industry Automation Corporation (SIAC)

National stock transfer service

Dividend settlement clearance

Broker Originated Window Ticket (BOWT)
Correspondent Delivery & Collection Service (CDCS)
Locked-in-trade (In planning stage)

Mr. Moss. Thank you, Mr. Gardiner.

Let me assure you that the committee remains on the schedule announced 2 years ago and we will be marking up within a few weeks and finally have resolution in the House of a bill which we hope reflects a constructive consensus on the part of this committee and justifies the amount of time that has gone into the package.

Mr. Broyhill.

Mr. BROYHILL. Thank you very much, Mr. Chairman.

Thank you again, Mr. Gardiner, for appearing before the committee. As you stated, a coordinated system of completing these security transactions is a vital need. You have rightly pointed out that there are many different parts of the system, many who participate in the system, and, of course, the regulatory authority is considerably fragmented. The banks, of course, hold securities and fiduciary capacity, but they are also involved in many of the stock transfer activities.

Granted, they feel that this part of the system is theirs because they are banks, and because they are banks perhaps they should not be regulated as other parts of the system are.

I joined with the chairman in introducing legislation in the past that would give clear authority to the SEC to regulate part of the banks' part of the system, but apparently there is resistance to this. As I recall, last year your association was endorsing this concept, apparently this year you have decided that you will change that stance. I would like to ascertain exactly what your recommendation is. As

1951

I understand it, you are saying that you would endorse regulatory authority over the depositories and give that to the SEC, is that correct?

Mr. GARDINER. I will put it in a different way and I think I am saying the same thing, Congressman. Our statement says that in the conceptual design of the regulation, yes, the SEC should have a very important role. Our statement also says that those functions which are banking functions, that is the depository, would come under the daily regulation, if you will, of the banking authorities. Thus, in effect we would have a doubleheaded regulatory arrangement whereby our members in the SIA who are brokers would be, as we are today, regulated in all our activities by the SEC, whereas the SEC and the banking authorities would create the appropriate regulation for the entire securities processing system with depositories being regulated directly by the banking authorities rather than by the SEC.

Mr. BROYHILL. Now, when you say regulated, you mean that they would draw up the regulations?

Mr. GARDINER. Together they would draw up the regulation, the two units, yes.

Mr. BROYHILL. What if they did not agree?

Mr. GARDINER. We recommend in our statement, sir, that the Congress make it very clear that the importance of this legislation is such that agreement-I don't know whether you could legislate agreement but you could certainly point out the imperative need for this agreement. I don't think there is that much at issue in terms of what the rules should be. I think the problem we have with our banking colleagues is not a matter so much of the rules in concept as it is in who is the regulator who carries them out.

I think that their concern, rightly or wrongly, is that they are now regulated by banking authorities and should stay that way and should not have additional regulation by another Government body, by the SEC. I don't think there is any problem to the construction of the rules under which the depositories would operate being a dual function.

Mr. BROYHILL. Well, it seems to me that if the SEC is going to have a role in this regulatory scheme that you are proposing, they should have some authority to go in and take a look at what they are doing. I don't see in your proposal that you would be endorsing this concept. Mr. GARDINER. In looking at the rules as carried out, no sir. We are recommending that that be their function insofar as the banks are concerned.

Mr. BROYHILL. Right, but what about oversight, the SEC's authority to see what the banking authorities are doing and how they are enforcing these regulations to see that it is done on an even-handed basis for the whole system.

Mr. GARDINER. Well, my best answer to that would that there would be continuing oversight between the senior Federal banking author-ities and the SEC. Once again, if they disagree I think reason has to prevail. I don't think we should create some new body above to oversee the two of them. I think there are reasonable men in both of these agencies who could work together on this matter.

Do you have anything to add, Dick, to this?

Mr. SCRIBNER. I think it can be required that there be mandatory consultation between the two organizations so that there is not a gap,

so that nothing falls between the cracks. It is our view, as expressed by Mr. Gardiner, that the overall regulatory scheme is one about which there should not be a good deal of disagreement. It is the carrying of those regulations into effect that raises the problem he has alluded to. I think the Federal banking agencies could be required to keep the Commission advised of their findings based on their own examinations and inspections and to post the Commission on what they are doing on the enforcement side as well. Presumably that would run in both directions so that the system would be tied together.

Mr. BROYHILL. Let me turn to another point. You endorse a study by the SEC of the street names. I gather you are saying we should go slow here. What are some of the problems that you see here? What are some of the reasons why we should stay with the same system we have now

?

Mr. GARDINER. One of the most important things that we hope to achieve is the immobilization of the certificate. The best way to immobilize that certificate is to have it in a common name. One of the problems that we get into, and one of the problems that the segmentation of our industry gives us is when we have to transfer literally hundreds, and thousands, and hundreds of thousands of pieces of paper out to hundreds of thousands of individual names. So what we are suggesting is that the SEC undertake this study so that we don't suddenly say there is something wrong with the street name because we know processingwise it is much more effective to have a single name, but we also recognize that it is our responsibility to see that those customers get their dividends, get their proxy material on time, get all the stockholder communications from the company as though the stock was in their name.

All we are suggesting is that the street name idea be given an opportunity, and that the study go forward because we recognize the responsibility. We also recognize the efficiency of the street name as a processing tool.

Do you want to comment on that, Jay?

Mr. CHALMERS. I think the problem is well stated. Our problem is we would like to keep the certificate in a place where it does not have to be moved. When certificates have to be transferred from customer name into firm name and then back again it certainly complicates the processing of transactions by the firm.

Mr. BROYHILL. Thank you, Mr. Chairman.

Mr. Moss. Mr. Breckinridge.

Mr. BRECKINRIDGE. I have no questions, Mr. Chairman.

Thank you, gentlemen.

Mr. Moss. Mr. Gardiner, I wonder what happens to this pattern of regulation when we move to that happy day where we have a certificateless society?

Mr. GARDINER. What happens to this regulation?

Mr. Moss. To the regulatory pattern which has been strongly urged by the banks and which now your group is moving more toward, although I notice in item 7 of your outline for a proposed national securities processing system that the entity will be self-regulatory in character and will be subject to the oversight of the SEC, with respect to all of its functions.

Mr. GARDINER. Yes. In the securities processing that we envisage and that these seven points outline, this system would work with a deposi

tory as we have outlined here so that the depository could still be in that other framework where all of us who are members of the national processing system would come under SEC oversight as we do today.

Mr. Moss. What is the nature of evolution of the function of the depository when we move from the actual physical holding of the certificates to merely the performance of recordkeeping when certificates are no longer used?

Mr. GARDINER. I could answer that two ways, sir. In the work of our Securities Processing Committee we have focused on the immediate problem. One of the reasons for our change in the direction we have taken as far as our banking friends are concerned is because of the immediacy of the need. Frankly, our committee has not gone beyond that to focus on that great day when the certificate is no more. I think there are a number of people in our industry who wonder if that great day will ever come only because we do have customers who have a lot of pieces of paper in their hands today and the evolution of getting all those pieces of paper back into a depository is something that could take a long, long time.

They are used to having something of value that they know is there. It is a little bit like the little old lady who puts cash in her mattress so she can have something in her hands. Many, many of our customers do.

Mr. Moss. I could go back a few years to a meeting of another subcommittee of the Committee on Interstate and Foreign Commerce when we were discussing the problem of proliferation of time zones in this country. We had witness after witness testify that it would be impossible to move to any kind of uniformity greater than the requirement that we start on a given day of the year and terminate on a given day of the year. Beyond that no uniformity. We would still be faced within a few miles of the city of Chicago with three or four time zones, and in one area of Indiana, double double daylight, things of that type. We were told you could not go beyond. I offered an amendment; it was adopted, we went way beyond.

Now why does a person feel that that certificate has merit? Have we had many conclusive studies indicating that the individual investorand I think in this instance we are discussing the individual investor

Mr. GARDINER. Yes.

Mr. Moss [continuing]. Insists upon a certificate rather than another form of evidence of ownership which by law would be in every way as valuable as the certificate which requires the signature of the owner in order to effect transfer.

Mr. GARDINER. No, sir. As far as a study is concerned, I do not know of any. What I am really reflecting to you, and I would like to ask Jay to comment on this, is vis-a-vis our individual investors, many of whom today want to have that evidence of ownership.

Mr. Moss. Is it complicated at all, the movement to no longer requiring a certificate, no longer having it constitute the sole evidence of ownership, if in those instances where a person feels he must have a certificate that he can have it at his option but for transfer he would have to follow a pattern based on evidence of ownership different from the certificate concept?

1954

Mr. GARDINER. I think what we are really saying here is that we would substitute one form of ownership for another. It would still be some form of ownership in that wonderful day.

Mr. Moss. In recordkeeping as there is with money I have in the bank.

Mr. GARDINER. Right. I cannot speak for all of our customers obviously, I think if there were an evidence of ownership like a savings bank account for example, a savings bankbook, I would think most people would accept that as something evidencing their ownership in a particular enterprise. I am not quite sure what we save if you still have to have that evidence of ownership.

Mr. Moss. Well, you would have to have some record of ownership, Mr. GARDINER. Of course.

Mr. Moss. The record of ownership is only an account number which can be verified.

Mr. GARDINER. Do you want to comment on that, Jay?

Mr. CHALMERS. Relating back to the original depository function without the certificate, the depositories do not see themselves as being vaults, that is not their role. They really see themselves as bookkeeping entities and this is their real future.

Mr. Moss. That is what I wanted the record to reflect, that is how they really see themselves.

Mr. GARDINER. Yes, they are not really interested in the certificate. themselves. I think the individual mostly is concerned about the security of having the certificate.

Mr. Moss. And the same thing comes up in connection with the jumbo certificate in street name.

Mr. CHALMERS. Exactly.

Mr. Moss. The fact is that with all of the work we are doing, when you start dealing with the individual customer who insists for a variety of reasons upon physical possession of the only thing which at the moment constitutes evidence of ownership, that we are really touching upon one of the costliest parts of this whole processing in the securities industry.

Mr. CHALMERS. Yes.

Mr. Moss. I have increasingly during my quarter of a century of legislating come to trust an instinct. The instinct is that the people will go for rational change if there is a good solid foundation for the change. If it will bring improvement and efficiency, they will go for it. There will be the rare exception but in the main people will go for change which ultimately benefits them and benefits the society. Here we are in an area where there is no question that removing the certificate removes a most onerous and costly burden.

Mr. GARDINER. That is right.

Mr. Moss. Perhaps we ought to focus more specifically upon that. Maybe we ought to be a little bit more daring, a little more willing to move beyond what we feel can't be changed because of practice of the past. Maybe it is fear that blocks the change rather than the facts.

Mr. GARDINER. Let me make one last statement, sir. Insofar as our membership of the SIA is concerned, we as broker-dealers would be