nated system of national depositories all across this Nation. So I would like to prevent anyone from having that veto power but again I go back to the rule of reason that if there were some financial problem with a particular depository that had been ordered into the system that there would have to be awfully good reason to have it prevented from joining or given time to right its ways to meet whatever the standards were. I think the standards of entry into any system are very important but I think that it would be incumbent upon the system itself and upon the regulatory bodies to give the entity a chance to meet its standards, and once it met the standards there should be no veto power over its inclusion in the system.

Mr. SCRIBNER. That is the difference between having legislation granting a veto power and the kind of practical reluctance you would find on the part of organizations to deal with somebody that they thought was unsafe or unsound. I think just as a practical matter you probably could not force somebody into a system if their business judgment told them that that was dangerous ground, so you may have a form of veto no matter what kind of system you construct.

Mr. CURTIS. We are talking about assigning to the bank regulatory agencies authority to establish substantive rules which would prescribe standards relating to the safety of the system.

Mr. GARDINER. If I could interrupt for 1 second, we want the same type of standards in the national securities processing system. We want that entity to be able to set standards as to whom it will accept business from, just as the NCC, for example, now has to set those standards which are largely financial for the protection of the entire system. So I think in any system there has to be a standard of entry, who can participate and who can meet the financial requirements of the system, but once having met those I think they should be welcomed into the system.

Mr. CURTIS. On page 7 of your statement, sir, you speak to the issue of user-owned and managed entities within the nationwide processing system and suggest that the functions should be owned and managed by user entities and not by stock exchanges or associations of these entities.

The uniform commercial code that you make reference to at present requires that depositories be owned by registered national securities associations or exchanges and that there is an effort underway to change that requirement to permit direct ownership by brokers and dealers in banks as well as stock exchanges and associations.

Once this is accomplished do you envision that that is where we are headed? Would your association not seek and withdraw any support for ownership by stock exchanges or assocation entities at that point?

Mr. GARDINER. There are two different areas here. One is the depository area, one is the clearance and settlement system. If I could go to the clearance and settlement system first.

We have been very encouraged at the steps that the New York stock exchanges have taken in planning to spinoff those functions away from the exchange itself. This is a step toward what we have been seeking for some years, as we testified a year ago.

In terms of the DTC and the depository function, the present theory is that the exchange owns it on behalf of its members; namely, the broker-dealers who are members of the SIA who are also members

1963

do except return the items to the transferor or his agent. Here again, I can't believe any legislation affecting transfer agents would correct these situations.

So-called legal transfers-for example, estates, trusts, joint ownership, foreign ownership are a completely different ball game. While much has been done through our efforts toward uniformity of requirements for such transfers, we are still subject to the inconsistencies of the laws of the individual States of incorporation as well as to the requirements laid down by the individual corporations for which the transfer agent acts. Legislation applicable to transfer agents will not simplify these problems.

The possibility of any agency establishing personnel standards, whether in terms of quality or quantity, is just beyond me. We did have personnel problems during the crunch, primarily because so many of our employees were being bought away from us for the so-called back rooms. Fortunately, we were able to call upon senior personnel from other areas of the bank in order to keep the work flowing and the schedules reasonably tight. I can't imagine any legislation or dicta of a regulatory agency which would cure such problems.

I would also submit that there are many ways with computers, mechanical equipment, or even manual systems to produce the simple transfer operation. The determination as to the particular means and methods adopted depends upon the individual situation, with due regard for peaks and valleys and the number of issues involved. Neither legislation nor regulation should decide these matters. They should be determined in the world of competition, economics, and the ultimate benefit to the user who is of course the stockholder.

Having said all these things on the negative side of legislation and regulation, I would like to state most strongly our support of regulation as to performance because this is the name of the game. Regardless of the electrical or mechanical equipment used, regardless of the types and numbers of people involved, regardless of the methods, systems, and flows of work; the turnaround schedules, the audit trials, and the consistency and accuracy of records must be maintained. But we are already regulated as to performance by the exchanges who keep records on transfer agents as to turnaround times, by the Deposit Trust Co., on the same basis, by the corporations for whom we act as agent, and finally by the Federal Reserve Bank, the Comptroller of the Currency and the New York State Banking Department. The banking regulatory agencies were concerned not only with turnaround times but also with the security and protection afforded to our operations, the audit trials, methods, systems, flows of work, and above all the reliability and accuracy of the records.

All of these I submit are integral parts of the term performance. These standards of performance already exist and are being effectively enforced by these agencies. I personally believe that each of them now has all necessary power and authority to require compliance and no further, and especially no separate, regulation by the SEC is either necessary or desirable.

If there is any question about such authority or power, there is certainly no objection on our part to legislation which would specifically grant such authority and power to these bank regulatory agencies. B to include in that legislation provisions which could be a deterrent

1962

read it in full because I believe it speaks for itself. Rather, I would like to summarize the position of the association.

Mr. Moss. Without objection the formal statement will be incorporated in the record and you may summarize at will.

Mr. THOMAS. Thank you.

By way of background, let me point out that the 12 member banks of the New York Clearing House Association act as transfer agent or cotransfer agent for approximately 95 percent 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 coregistrar for approximately 81 percent of these same issues. Moreover, the member banks perform similar services for many issues that are traded over-the-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 12 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. All of these are eligible for deposit with an appropriate depository.

I would like to talk for a few minutes about transfer agents and registrars. I submit that the job of the stock transfer agent is basically a very simple debit and credit operation. The transfer agent receives from the owner or his agent the old certificate with the proper endorsement and the signature guaranty, together with instructions as to the name, address, and social security or taxpayer number of the new owner. The transfer agent checks the genuineness of the certificate, the fact that the endorsement is exactly as the owner's name appears on the face of these certificates, and the authenticity of the signature guaranty. It then refers to its records to make sure that the particular certificate or certificates are actually held by that owner and that there are no stops or other legal impediments to the transfer. The old certificates are then canceled and the new ones are issued in the name of the new owner with address and social security number or taxpayer number included. The issuing company's books as maintained by the transfer agent are then updated to record the debit of the old certificates and the credit of the new certificates. The registrar then reviews the old and new certificates to make sure that there has been no overissuance, which is the registrar's principal function and responsibility. A transfer of securities is one of the simplest operations that we perform in the bank provided the documents are presented to us in proper form. There are always problems of peaks and valleys in the volume of work and we are expected to staff for normal swings. There are also situations, and there is one in New York right now, in which computers do not function because of blackouts, brownouts, hardware, or software failures. But I cannot conceive that these problems could be eliminated by legislation.

It is unquestionably true that the difficulties of bank transfer agents during the "paper crunch" stemmed primarily from the condition in which the work was received. When the instructions call for the transfer of 300 shares and the envelope contains 200 shares or 400 shares or the endorsement is not proper or the signature guaranty is missing or contains a signature which has not yet been furnished to the transfer agent or the name of the transferee is missing or there is no address-in any of these cases, there is nothing the transfer agent can

1963

do except return the items to the transferor or his agent. Here again, I can't believe any legislation affecting transfer agents would correct these situations.

So-called legal transfers-for example, estates, trusts, joint ownership, foreign ownership—are a completely different ball game. While much has been done through our efforts toward uniformity of requirements for such transfers, we are still subject to the inconsistencies of the laws of the individual States of incorporation as well as to the requirements laid down by the individual corporations for which the transfer agent acts. Legislation applicable to transfer agents will not simplify these problems.

The possibility of any agency establishing personnel standards, whether in terms of quality or quantity, is just beyond me. We did have personnel problems during the crunch, primarily because so many of our employees were being bought away from us for the so-called back rooms. Fortunately, we were able to call upon senior personnel from other areas of the bank in order to keep the work flowing and the schedules reasonably tight. I can't imagine any legislation or dicta of a regulatory agency which would cure such problems.

I would also submit that there are many ways with computers, mechanical equipment, or even manual systems to produce the simple transfer operation. The determination as to the particular means and methods adopted depends upon the individual situation, with due regard for peaks and valleys and the number of issues involved. Neither legislation nor regulation should decide these matters. They should be determined in the world of competition, economics, and the ultimate benefit to the user who is of course the stockholder.

Having said all these things on the negative side of legislation and regulation, I would like to state most strongly our support of regulation as to performance because this is the name of the game. Regardless of the electrical or mechanical equipment used, regardless of the types and numbers of people involved, regardless of the methods, systems, and flows of work; the turnaround schedules, the audit trials, and the consistency and accuracy of records must be maintained. But we are already regulated as to performance by the exchanges who keep records on transfer agents as to turnaround times, by the Deposit Trust Co., on the same basis, by the corporations for whom we act as agent, and finally by the Federal Reserve Bank, the Comptroller of the Currency and the New York State Banking Department. The banking regulatory agencies were concerned not only with turnaround times but also with the security and protection afforded to our operations, the audit trials, methods, systems, flows of work, and above all the reliability and accuracy of the records.

All of these I submit are integral parts of the term performance. These standards of performance already exist and are being effectively enforced by these agencies. I personally believe that each of them now has all necessary power and authority to require compliance and no further, and especially no separate, regulation by the SEC is either necessary or desirable.

If there is any question about such authority or power, there is certainly no objection on our part to legislation which would specifically grant such authority and power to these bank regulatory agencies. But to include in that legislation provisions which could be a deterrent for

progress and performance or which would add the confusion of an additional regulatory agency for the establishment of standards or the monitoring of performance would seem to be unnecessary, unwise, and perhaps even self-defeating.

The association believes that the present system for the transfer of securities is working well and that the improvements since 1969 as a result of voluntary action by the industry, 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 transfer agents and registrars should overlook the current pattern of bank regulation and examination.

The position of the association 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, and BASIC's memorandum pointed out that:

(1) 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.

(2) Banking authorities have analogous experience that could profitably be used in the regulation of depositories, and sufficient resources to do the job.

(3) Banking authorities are not given a sufficient role in the development of depositories, particularly in rulemaking as to safeguards for securities and funds.

The provisions of H.R. 5050 relating to access, disciplinary relations, and management participation are, we think, deficient in that: (1) the bill would guarantee access to entities whose character or financial qualifications might actually deter the degree of participation by others needed to make the depository succeed; (2) the bill would interject the depository between participants and their officers 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 nonshareholders 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.

CONCLUSION

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 nonbank 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