Testimony of Charles W. Buek Chairman of the Board United States Trust Company Appearing on Behalf of the New York Clearing House Association Before the Securities Subcommittee of the Senate Banking, Housing and Urban Affairs Committee Wednesday, December 10, 1975 I am Charles W. Buck, Chairman of the Board of United States Trust Company of New York. I am appearing today as a spokesman for The New York Clearing House Association. I am pleased to be with you this morning to discuss the role our member banks play in providing securities services for their customers. We have read this subcommittee's Study Outline dealing with the securities activities of commercial banks. We commend the staff for the thorough analysis it has made. It is our objective to shed some additional light upon the questions posed there. The member banks of our Association offer most of the securities and investment services covered in the Study Outline. Specifically they offer dividend reinvestment services, automatic investment services, individual portfolio management services, and bank advisory services to investment companies. Some of the members have been instrumental in developing and perfecting these banking activities. We firmly believe that these services are in the public interest and that they are a natural extension of those banking activities which were authorized for commercial banks when the banking laws were last fundamentally altered in 1933. It is particularly important, we believe, to emphasize at the outset that the services which our members provide in this area are well entrenched and of long standing. They, or their antecedents, have been offered for many years without objection or challenge. They are discussed in detail in Appendix A attached. Bank Examinations All of the member banks of the Clearing Houde are also members of the Federal Reserve System. Three of them are national banks and as such are regulated by the Comptroller of the Currency. The eight state chartered banks are regulated by the Superintendent of Banks of the State of New York. The bank examiners are paying an increased amount of attention to bank securities activities. The various statutes regulating national and state banks provide for detailed compulsory examinations. These examinations afford participants in bank sponsored investment services substantial protection against violations of applicable rules and standards, questionable operational practices, misuse of funds or property held for the investor and agent or fiduciary insolvency. In the case of national banks, two separate types of examinations are required: (i) a specific examination into the bank's fiduciary and trust operations and (ii) an examination into the financial condition of the bank as a whole. National banks which have been licensed by the Comptroller to provide trust and other fiduciary services are subject to annual examination. The bank examiner physically examines the records of the trust department and interviews bank officers and employees as to the operation of the department. He is instructed to investigate every area of the trust department's operation, including internal controls and audits, operation and administration policies and practices, ininvestment policies and practices, conflicts of interest, self-dealing and any situation which might pose a question of divided loyalty on the part of the bank. The statutory requirement of a general examination of a national bank is contained in 12 U.S. C. §481. Pursuant to the authority granted in this Section, the Comptroller has established precise and exhaustive procedures for such examinations, the timing of which is varied so that no pattern is developed which would enable bank personnel to anticipate examinations. Teams of examiners inspect and verify every aspect of a bank's operations, including physical count of cash, securities and other assets. There is a review of procedures for holding items in safe-keeping for customers, the examiners determining the adequacy of safe-keeping records and insurance coverage as well as whether items on hand are verified against the bank's records at reasonably frequent intervals. Examiners are instructed to include in their examination report comments as to all significant matters concerning the operation of the bank which they determine should be brought to the attention of the Comptroller and the bank. State banks are likewise subject to examinations, usually conducted jointly by examiners of the Board and the home state, which insure their financial integrity and the adequacy of the performance of their agency and fiduciary duties. For example, in New York the Superintendent of Banks is required to conduct annual examinations of state banks. Broker-dealers registered under Section 15 of the Securities Exchange Act are schedule for periodic examinations by investigators employed by the Securities and Exchange Commission. NASD examiners and national securities exchanges also regularly check their member firms. However, these examinations are primarily for the purpose of determining net capital position and compliance with rules governing the extension of credit. Judgmental decisions are not made with respect to the quality of the services rendered. Management is not evaluated. The Commission does not have the power to make subjective judgments concerning brokerdealers under its jurisdiction. Unlike the laws regulating banks, the securities laws do not authorize such regulation. Public Benefits Dividend Reinvestment Plans and Automatic Investment Services are primarily directed to the small investor who wishes to make regular, |