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Congress not to adopt legislation which ignores the existence of a competent group of regulators who are in the best position to prescribe and evaluate standards of performance of bank transfer agents and registrars and securities depositories in the broader context of standards of sound banking practices. Thank
Mr. Lee is here and we would be glad to answer any questions to the best of our ability.
[Mr. Thomas' prepared statement follows:]
STATEMENT OF WALTER F. THOMAS, CHAIRMAN, STEERING COMMITTEE, NEW YORK
CLEARING HOUSE ASSOCIATION
Mr. Chairman and members of the Subcommittee-My name is Walter F. Thomas, I am Vice Chairman of the Board of Manufacturers Hanover Trust Company of New York. I am appearing before you today in response to your invitation to express the views of the New York Clearing House Association on proposed legislation affecting the transfer, clearance and settlement of securities transactions. The New York Clearing House Association is an association of twelve commercial banks in New York City. Sitting with me is Mr. John F. Lee, Executive Vice President of the Association.
My presentation will address itself to those portions of Title IV of H.R. 5050 which deal with securities processing—the transfer, clearance and settlement of securities transactions.
By way of background let me point out that the twelve member banks of the New York Clearing House Association act as transfer agent or co-transfer agent for approximately 95% of the issues which are listed for trading on the New York Stock Exchange and the American Stock Exchange. They also act as registrar or co-registrar for approximately 81% of these same issues. Moreover, the member banks perform similar services for many issues that are traded overthe-counter, and they act as paying, issuing and transfer agents for most of the bonds issued by the nation's large corporations. In addition, the twelve banks alone hold for the account of their customers in excess of 2.8 billion shares of stock having a market value of at least $108 billion, which are eligible for deposit with an appropriate depository.
The position of the New York Clearing House Association may be summarized as follows. Banks share the desire of Congress as well as every stockholder, issuer and broker for a system of speedy, efficient and economic settlement and transfer of securities and securities transactions. The Association believes, however, that the present system for the transfer of securities is working well and that the extent of improvement since 1969 as a result of voluntary action by the industry, and particularly the banks, is not well understood or appreciated. The Association does not believe that legislation aimed indirectly at regulating bank participation in securities depositories or aimed directly at them as transfer agents and registrars should overlook the current pattern of bank regulation and examination. By granting responsibility for registration, promulgation of substantive standards and enforcement solely to the Securities and Exchange Commission, H.R. 5050 ignores the role of the Federal and State banking agencies and would lead to overlapping and confusing regulation. We regard the delegation to the appropriate bank regulatory agencies of full responsibility for the internal operation of those securities depositories that are established under State or Federal banking law and of all bank transfer agents or registrars as essential for a workable regulatory pattern.
DEVELOPMENT SINCE 1968–70 “CRUNCH"
There have been a variety of innovations and developments in the area of securities processing since the “paper-work crunch" of the late 1960's, so that in the case of stock transfer regulation H.R. 5050 may be the classic example of legislation at a time when the crisis has passed and the problems have been corrected. With the assistance of the bank regulatory agencies which currently exercise jurisdiction over bank transfer agencies and which will retain jurisdiction irrespective of whether or not H.R. 5050 is enacted, delays in processing stock transfers have been for the most part eliminated. Moreover, the industry
is witnessing a phenomenon which the Congress may wish to assess at greater length before legislating. This phenomenon is the market decrease in requests for stock transfers which is occurring quite unrelated to the volume of shares traded.
The volume of stock transfers in the member banks of the Association during the first half of 1972 was down 34% from what it was in the first half of 1969. That is to say, the level of activity in the stock transfer area was in the first six months of 1972 only 66% of what it was in 1969. During the last half of 1972 and the first half of 1973, the volume has continued to drop. This is a drop which cannot be explained by the decrease in the volume of stock traded. Rather, it reflects a steadily increasing percentage of ownership by institutional investors, increasing use of jumbo certificates and the expanded use of The Depository Trust Company (formerly Central Certificate Service).
Perhaps as important in alleviating delays in processing securities are the improvements in procedures which have been made by the member banks of the Association. Since 1969 the twelve banks have spent in excess of $50,000,000 for capital improvements in the stock transfer and registrar area. Significant increases in trained personnel have been made. Night forces have been added where none existed before. Although some operations were computerized before 1969, five of the member banks have completed computerization of their transfer and registrar work since that date. All members have instituted periodic and random testing procedures to ascertain more accurately the level of work performance; they have instituted special audits over movement control and safekeeping of certificates and they have given their employees special training. All member banks have become highly sensitive” to inquiries from customers. Reports to top level management now focus on such inquiries and special research teams have been organized in most banks provide prompt answers, Industry-wide steps have been taken at the initiative of our Association, to improve the overall performance of transfer agents. These steps include new forms and procedures for controlling the movement of certificates in bulk between brokers and banks, the use of facsimile signatures in place of manual signatures and the employment of jumbo certificates.
Another development which has occurred since the paper-work crisis, and as a result of it, has been a closer liaison between the stock exchanges, the bank examiners and the bank stock transfer agencies. The New York Stock Exchange has adopted Rule 496 and the American Stock Exchange, Rule 891, which establish a 48 hour maximum for stock transfers. This is also the time period prescribed by the New York Clearing House Association. The Exchanges monitor their rules and report performance times. The bank examiners are also aware of the rules and they check to see that such time limitations are being met when they examine member banks.
At the same time that changes and improvements were occurring in the transfer agency area, the Association was devoting considerable time, effort and money to the successful creation of a comprehensive securities depository in New York City, now known as The Depository Trust Company (“DTC”). The effort, which began before the Congress or the SEC took an active interest in the problem, grew out of a realization on the part of the financial institutions involved that the volume of paper work had to be curtailed and handled more efficiently. The banking and the securities industries agreed that this goal could only be reached if stock certificates were largely immobilized and ownership transferred through book entry.
Thus, another important reason for the declining volume of securities transfers has been the continuing effort by all parties concerned to immobilize the stock certificate. This has been done largely through the successful operation in New York City of DTC which provides a system of book entry transfers. In 1969 when the predecessor of this depository was just beginning operations, only 1,212 issues of stock were eligible for deposit and transfer. All were issues listed on the New York Stock Exchange. Now 2,899 issues are on deposit, embracing in addition to New York Stock Exchange issues, issues listed on the American Stock Exchange, the National Stock Exchange and some traded over-the-counter. In terms of total shares, there were 464 million shares on deposit in 1969. Today, there are 1.5 billion shares on deposit, worth approximately $60 billion. Total book entry deliveries at the depository have increased from 700 million shares in the first half of 1970 to over three billion shares in the first half of 1973.
Participation in DTC includes brokers and all types of financial institutions. Each of the twelve member banks has joined. Securities clearance activity 1967
through DTC has increased to the extent that it now accounts for over 50% of the member banks' total securities clearings. Also, the banks have contributed or pledged contributions to the DRC protection fund, which is designed to provide insurance against loss.
In addition, member banks have begun, on a trial basis, to make substantial deposits in DTC. Nearly 60,000,000 shares have been so deposited. Unless interrupted, this trend will undoubtedly increase, bringing with it a corresponding reduction in transfers. Member banks of the Association now hold on account for their customers more than 2.8 billion shares which have not yet been placed in DTC. These shares alone, if deposited, would increase the total number of shares on deposit with DTC from 1.5 billion to over 4.3 billion. Moreover, if these bank-held securities were placed on deposit, approximately 22,000 manual deliveries between brokers and banks, involving about $730 million, could be eliminated per week. Finally, as the depository develops, corporate and municipal bonds may also become eligible, adding many more billions of dollars to the value of the securities immobilized. Transfer Agency Provisions of H.R. 5050
The major concern of the members of the Association with the transfer agency provisions of H.R. 5050 lies in the fact that the Bill will add yet another layer of regulation-by the Securities and Exchange Commission—to a banking industry which is already fully regulated.
To illustrate, under H.R. 5050 :
all transfer agents must register with the SEC on a registration form prescribed by the SEC;
all rules and regulations governing the entire securities processing industry, including banks acting as transfer agents, are to be formulated, promulgated and enforced by the SEC;
authority is given to the SEC to decide what books and records should be maintained by transfer agents and to examine such books and records; and
the SEC is authorized to censure, bar, suspend for a period not exceeding twelve months, or place limitations upon any transfer agent or any partner, officer, director or employer of any transfer agent. Recognition of existing bank regulatory authorities is found in only two provisions : that the SEC, upon request, will furnish a copy of its report of any examination of a transfer agent to the appropriate bank regulatory agency and that the SEC shall “consult and cooperate" with the appropriate bank regulatory agencies.
It should be noted that the problems toward which these proposals in H.R. 5050 are directed—problems of efficiency and accuracy in the effectuation of stock transfers—are problems that cannot be solved by administrative fiat alone, and further, are roblems that the transfer agents themselves have a plain and vital self-interest in curing. The actions described above were initiated by banks in their capacities as transfer agents as a matter of business judgment and without prodding from governmental agencies.
If the stock transfer and registration activities of banks were not already thoroughly regulated and examined by the bank supervisory agencies, perhaps the need for the SEC to establish standards as to the performance by banks of transfer functions, measures, and personnel standards for safe handling and custody of securities and funds could be understood. But this power presently exists in and is utilized by bank regulatory agencies.
Bank examiners are thoroughly familiar with the operational and personnel requirements for a safe and efficient bank transfer and registrar department. Bank examiners have been increasingly vigilant in the attention they have paid to corporate trust and stock transfer departments since the "paper-work crunch" of 1968–70. For example:
The Federal Reserve Bank of New York has completely revised its instructions to examiners, placing emphasis upon performance time, back-logs and procedures adopted by management for monitoring the status of its own performance.
The regional office of the Comptroller of the Currency in New York is now placing great emphasis during the course of its examinations upon the turn around time in stock transfer departments.
The Superintendent of Banks of New York State issues detailed instructions to examiners relating to the operation of stock transfer departments of State chartered banks. New York State has also created a special automation unit whose employees are trained in special techniques for checking on transfer agents whose operations have been automated.
In the course of their examinations, examiners check for compliance with stock exchange rules and regulations and make recommendations for improvements in the operations of these departments. In doing so they apply the principle that sound banking practices require that bank transfer agents and registrars act promptly and efficiently.
In these circumstances we believe it would not be desirable to inject a new regulatory agency into the supervision and regulation of bank transfer activities. Indeed, there is danger that such a step would be counterproductive. The uncertainties that would be occasioned by the SEC's entry into the regulation of banking activities, and the possibilities for conflict between the requirements prescribed by the SEC and those prescribed by the bank regulatory agencies, which are not relevant to a bank transfer agent which is providing a variety of examination and supervision of banks, could produce significant delays, conflicts or other difficulties in achieving further improvements in the handling of securities transfers.
If the SEC were, for example, to specify personnel standards which are appropriate for a non-bank transfer agent, it might be applying considerations which are not relevant to a bank transfer agent which is providing a variety of related services such as communication to and from shareholders, dividend disbursements, etc. The bank transfer agent would be required to serve two masters because nothing in the bill would eliminate the existing bank regulatory agency control over this department of a bank. The resulting additional expense and administrative burden is not in the public interest; in fact it might impede efforts to improve transfer services even further.
Moreover, the on-going responsibilities of maintaining books and records for two or more regulatory agencies, of updating registration information, and generally of conforming to a multiplicity of rules and reporting requirements would represent a needless and unfortunate drain upon transfer-agency resources. It would be ironic if, in the name of decreased paperwork and increased efficiency, transfer agents were required to increase paperwork and to divert resources from their transfer operations solely to accommodate a duplicative regulatory regime.
In other areas of securities regulation, Congress has recognized the desirability of avoiding duplication, with respect to supervision of the activities of banks and has allocated responsibility to the agency with expertise in the banking field. No case has been made for subjecting banks to duplicative régulation with respect to their securities transfer activity. In fact, there is every reason to retain the jurisdiction of the federal banking agencies over securities transfers by banks, just as the 1964 Amendments to the Securities Exchange Act of 1934 established such jurisdiction with respect to the outstanding securities of banks.
In short, we believe that no new regulatory authority over transfer agents is necessary or desirable. The banking agencies already possess fully adequate authority to continue their supervision in this field, and the grant of such authority to the SEC would be duplicative and could be counterproductive.
Our position on the provisions of H.R. 5050 relating to securities depositories coincides with the position expressed to the Committee by the Banking and Securities Industry Committee (BASIC). BASIC's memorandum points out that:
Banking authorities are the most appropriate agencies for the regulation of securities depositories, and assignment of the task to such agencies would call forth the degree of bank participation that is necessary to maximize the public benefits of such depositories.
Banking authorities have analogous experience that could profitably be used in the regulation of depositories, and sufficient resources to do the job.
Banking authorities are not given a sufficient role in the development of depositories, particularly in rule making as to safeguards for securities and funds. funds.
The provisions of H.R. 5050 relating to access, disciplinary relations and management participation are deficient in that:
1. The bill would guarantee access to entities whose character, operational capability or financial qualifications might actually deter the degree of participation by others needed to make the depository succeed ;
2. The bill would unwisely interject the depository between participants and their officers and employees in requiring the depository directly to discipline the latter as well as the former; and
3. The bill would conflict with well-established principles of corporate management by conferring representation upon non-shareholders in the adoption of rules, the selection of officers and directors, and in all other phases of administration.
Accordingly, we endorse the recommendations of BASIC with respect to the depository provisions of H.R. 5050.
Stock transfer and registration are only parts of the broader fiduciary, custody and agency functions performed by banks. A government agency which is not thoroughly familiar with the other activities performed by banks in the entire securities area might well adopt regulations which might be workable for a non-bank transfer agent but would be inconsistent with the standards prescribed by the appropriate banking agency. Congress has traditionally deferred to the expertise of bank regulatory bodies because it recognizes that regulation of banks requires a balancing of various interests including the solvency and integrity of the banking system. The Association urges Congress not to adopt legislation which ignores the existence of a competent group of regulators who are in the best position to prescribe and evaluate standards of performance of bank transfer agents and registrars and securities depositories in the broader context of standards of sound banking practices.
Mr. Moss. Thank you, Mr. Thomas.
I just wanted to ask one question to focus the clearinghouse position. You have endorsed the position of BASIC, I take it, if the Congress insists upon legislating in this area and establishing the regulatory machinery; is that right?
Mr. THOMAS. Yes.
Mr. Thomas. That is not true for security depositories. You are talking about the security depositories now!
Mr. CURTIS. That is what I am trying to draw the line between. It is just with respect to the transfer agent function.
Mr. Thomas. We do not believe that legislation is necessary.
Mr. CURTIS. Now to the extent that we evolve to that day when transfer function is merged with the depository function through the formation of transfer agent depositories or entities or in any other function besides pure transfer agent function, would you at that time feel that the Federal regulation should and would extend to the transfer agent?
Mr. THOMAS. I would answer that personally because I don't think this question has ever come up. But if you ever get to the point where transfer agents are themselves acting as depositories, that is a completely separate and distinct function and that would become a fiduciary function relating to the holding of securities for others. That is custodial, let's say, for one of the depositories, as entirely opposed to a recordkeeping function where we are acting as an agent for the corporation retaining its books and records and that could still be kept separate and apart and in my opinion would need no legislation because it would be acting on the instruction and authority of a buyer or seller just like we have it today.
Mr. CURTIS. Mr. Thomas, maybe there is one matter that has not been clearly set out in this record and that is why is it necessary for a depository to be a bank!