municipal revenue bonds. Each succeeding section contains a brief description of these services and certain of the more important provisions of the applicable Federal securities and banking laws and regulations as well as a number of questions which will be considered by the Subcommittee. These questions are formulated to indicate the nature and scope of the Study and should not be regarded as exhaustive. It is expected, however, that they will serve as the basis for subsequent formal and informal questionnaires, interviews and public hearings.

All interested commentators are encouraged to submit to the Subcommittee written responses to these questions. Other comments and suggestions on the organization and direction of the Study are also welcome and will receive careful consideration.

Hannon Wellains

Chairman.

STUDY OF SECURITIES ACTIVITIES OF COMMERCIAL

BANKS

SECTION I-DIVIDEND REINVESTMENT PLANS

A. DESCRIPTION

5

Under the typical dividend reinvestment plan shareholders of a participating corporation may direct that their dividends be paid by the corporation directly to a bank which aggregates all such dividends and purchases additional shares of the issuer corporation's common stock for the accounts of participating shareholders. Participating shareholders also may contribute additional cash to the bank for investment, along with the cash dividends, in the corporation's common stock. Some plans permit a participating shareholder to deposit with the bank the securities of a different class issued by the same corporation and to have dividends or interest received with respect to all deposited securities reinvested by the bank in the corporation's common stock.

The bank acts as agent for a company's participating shareholders in purchasing securities and in receiving and reinvesting dividends and interest. Purchases are made in the open market and the service fees of the agent bank and brokerage commissions are deducted from the amounts available for investment. Each participant receives a statement following each investment for his account indicating cash received, shares purchased and total shares held by the bank for the shareholder. Participation in a dividend reinvestment plan may be terminated at any time.

Automatic reinvestment of dividends and capital gains distributions are services which open-end investment companies (commonly referred to as "mutual funds") have offered their shareholders for many years. Although brokerage firms often receive large amounts of dividends from many issuers whose shares they hold in nominee name on behalf of customers, they do not appear to have developed any comparable arrangements with corporations whereby the corporation as

5 The Securities and Exchange Commission's 1974 release, Securities Act. Rel. No. 5491 (April 30, 1974), requesting comments on certain policy and legal questions associated with bank sponsored investment services described the broad features of many services within the scope of the Subcommittee's Study. The following descriptions have been based on the Commission's release and information received in response to that release. (See Sec. File No. S7-522).

sists them in offering to stockholders a dividend reinvestment plan. However, some brokerage firms have incorporated a dividend reinvestment plan feature in automatic investment plans. In these plans investments by employees of participating companies are pooled in order to reduce commission costs on the purchases of stock in the employer

company.

B. SECURITIES LAWS

According to positions taken by Securities and Exchange Commission ("SEC") staff in published "no action letters," dividend reinvestment plans which meet certain conditions do not involve separate securities subject to the registration requirements of the Securities Act of 1933, the Securities Exchange Act of 1934 or Rule 10b-6 thereunder, or the Investment Company Act of 1940. The conditions set forth by the staff generally are those discussed in Securities Act Release No. 33-4790 (July 13, 1965), which deals with the applicability of the Securities Act of 1933 to employee stock purchase plans.

C. BANKING LAWS AND REGULATIONS

Bank regulatory agencies view dividend reinvestment plans as involving nothing more than a brokerage service and, therefore, a traditional banking service.

D. QUESTIONS AND ISSUES

1. Do the interests of participants in dividend reinvestment plans constitute securities, as defined in § 2(1) of the Securities Act of 1933, requiring registration under the Securities Act of 1933?

2. Do the dividend reinvestment plans involve a pooling or investment company equivalent which should be required to be registered under the Investment Company Act of 1940?

3. What protections under the securities laws and regulations: (a) are currently available to participate in such plans?

(b) are not available as a result of the bank exemption from

the securities laws and should be?

4. Assuming the legality of the basic brokerage functions performed in connection with dividend reinvestment plans is established under the Glass-Steagall Act, do the promotional activities surrounding these activities challenge that validity?

See, eg., Personalized Investment Plan [1972-73 Transfer Binder] CCH Fed. Sec. L. Rep. 78.850 (avail May 21. 1972).

See Chase Manhattan Bank [1971-72 Transfer Binder] CCH Fed. Sec. L. Rep. 178.368 (avail July 12, 1971); Chase Manhattan Bank, N.A. [1972-73 Transfer Binder] CCH Fed. Sec. L., Rep. 78.915 (avail July 6 and July 10, 1972); J. P. Morgan & Co. [1971-72 Transfer Binder] CCH Fed. Sec. L. Rep. 178,481 (avail Oct. 22, 1971); J. P. Morgan & Co., Inc. [1972-73 Transfer Binder] CCH Fed. Sec. L. Rep. 178,854 (avail. June 19, 1972); Lucky Stores, Inc. [1974-75 Transfer Binder] CCH Fed. Sec. L. Rep. 179.903 (avail. June 5, 1974); Ontario Securities Commission [1972-73 Transfer Binder] CCH Fed. Sec. L. Rep. ¶ 78,885 (avail. June 11, 1972.)

SECTION II-AUTOMATIC INVESTMENT SERVICES

A. DESCRIPTION

8

Through the automatic investment service a bank offers checking account customers the opportunity to have a specific amount of money deducted monthly from their checking accounts and invested by the bank in the common stock of one or more issuers which are included on a list prepared by the bank. The number of issuers included by banks on their lists usually is limited to the twenty-five or so corporations with the greatest total market value of outstanding common stock.

There is a minimum and maximum monthly investment per stock. Periodically, but not less frequently than one a month, the bank accumulates the deductions for purchases of each particular stock and purchases whatever amount of stock the aggregated funds will buy. Acting pursuant to an agency agreement with its customers, the bank may acquire the securities on a national securities exchange through a broker-dealer, in the over-the-counter market or in the third market, or by negotiated transactions.

A purchaser may terminate his participation in the plan or in the purchase of any particular stock at any time, and upon termination the bank will either deliver share certificates for all full shares purchased or sell full shares if so requested.

Each purchaser under the plan pays his proportionate share of the brokerage charges and a bank service charge. The pro rata brokerage costs plus the bank service charges are said to often be less than the brokerage charges which would be paid by a participant if he made his purchase individually through a broker.

Registered open-end investment companies have offered shareholders automatic investment plans since at least the early 1960's. Under the typical mutual fund plan, a shareholder gives the investment company's transfer agent continuing authority to draw checks in a specified amount against the shareholder's local bank checking account for investment.

The New York Stock Exchange for many years has offered small investors its Monthly Investment Plan through member firms. This Plan permits customers to make regular investments in listed securities in small amounts. In the past few years similar independent investment plans have been introduced by a number of brokerage firms.

B. SECURITIES LAWS

The Securities and Exchange Commission staff has given "no action" and interpretive letters indicating that the staff would not recommend action under the Securities Act of 1933 to the Commission for failure to register participations in an automatic investment service plan under section 5 of the that Act and also has issued no action let

8 See note 5. supra.

9

• See Investment Data Corporation [1971-72 Transfer Binder CCH Fed. Sec. L. Ren. 78 668 (avail. Jan. 28. 1972): Investment Data Corporation [1972-73 Transfer Binder] CCH Fed. Sec. L. Rep. ¶ 79,034 (avail. Sept. 25, 1972).

ters indicating that the staff would not recommend action under the Investment Company Act of 1940 for failure to register as an investment company. 10 The SEC staff is no longer providing no action letters for automatic investment service programs "because of legal uncertainties in this area.' 99 11

C. BANKING LAWS AND REGULATIONS

The Comptroller of the Currency ruled in an unpublished letter, dated February 27, 1972, to the Security Pacific National Bank that the operation of AIS does not violate the Glass-Steagall Act.

D. RECENT DEVELOPMENTS

The Investment Company Institute has urged the Securities and Exchange Commission to exercise its authority under the Securities Exchange Act of 1934 to regulate banks operating automatic investment service plans. The Securities and Exchange Commission, to the subcommittee knowledge, never replied to this written request. In this connection, during the last Congress, Senator Brooke introduced a bill to amend the Securities Exchange Act of 1934 to "facilitate the regulation of banking institutions regularly engaged in the business of effecting transactions in securities for the accounts of others." 12 This bill would have authorized the SEC to regulate bank-sponsored automatic investment service plans. No hearings were held on the bill and it has not been re-introduced this session.

In August, 1973, the Investment Company Institute requested reconsideration by the Comptroller of the Currency of his 1972 ruling on the ground that automatic investment service is prohibited by Sections 16 and 21 of the Glass-Steagall Act. A month later, the New York Stock Exchange submitted a similar request, also urging that automatic investment service authorization be terminated until final determination of this issue.

The Comptroller reaffirmed his original position in June, 1974, specifically analyzing and rejecting the principal Investment Company Institute and New York Stock Exchange arguments.13 The New York Stock Exchange and Investment Company Institute sued the Comptroller for declaratory and injunctive relief in September, 1974, in the U.S. District Court of Columbia." Oral arguments on motions for summary judgment in the case are scheduled for the near future.

E. QUESTIONS AND ISSUES

1. Do the interests of participants in an automatic investment service plan themselves constitute securities, as defined in § 2(1) of the Securities Act of 1933 required to be registered under section 5 of that Act?

10 See Investment Data Corporation [1973 Transfer Binder] CCH Fed. Sec. L. Rep. ¶ 79.411 (avail. June 15, 1973): see also Security Pacific National Bank [1973 Transfer Binder] CCH Fed. Sec. L. Rep. ¶ 79,412 (avail. June 21, 1973).

11 See SEC staff letter to Anthony F. DiFabio, Esq. (avail. June 28, 1974).

12 S. 2707, 93d Cong., 2d Sec. (1974).

18 Comptroller of the Currency-Bank Automatic Investment Services [1973-74 Transfer Binder] CCH Fed. Sec. L. Rep. ¶ 79,817 (June 10, 1974).

14 New York Stock Exchange, Inc., and Investment Company Institute v. James E. Smith, Comptroller of the Currency. Civil No. 74-1405 (D.D.C.. filed September 24, 1974). The complaint is reprinted at [1974-75 Transfer Binder] CCH Fed. Sec. L. Rep. 94,798.