Treasury Plans Safeguards for Securities

A Treasury proposal to fine-tune the bookkeeping practices on the sales of government securities will provide additional safeguards against abuses by unscrupulous dealers, a department official said Tuesday.

John J. Niehenke, acting assistant secretary of the Treasury, told a House Banking panel that such plans to expand the book-entry system constitute a cost-effective means of increasing investor confidence in the market.

Niehenke said that, beginning in July, 1986, new issues of Treasury securities will be available only in book-entry form and no investor will be permitted to hold the physical paper.

Should Include Dealers

Also testifying was Federal Reserve Board Chairman Paul A. Volcker, who said that any new regulation on government securities should include all dealers and not exclude banks as recommended by some proposed legislation being considered by the subcommittee on domestic monetary policy.

Volcker said he prefers that Congress create a single self-governing body to write basic regulations for dealers in government securities, with oversight and veto power vested in the Federal Reserve and other federal agencies involved in the securities market.

Rep. Doug Barnard of Georgia asked Volcker if the legislation would have headed off the failure earlier this year of several companies with dealings involving government securities. The collapses sparked thrift institution crises in Ohio and Maryland.

Volcker replied that the stricter regulation reduces the possibility that such events would happen again, but there would be no guarantees.

“It won’t eliminate those risks, but it could cut them down,” he said.

Niehenke said there is no need to adopt what he called “excessive protection” over government securities trading. He said the cost of such unneeded regulation would be passed on to all taxpayers.

Lead to Conflict

“To charge another agency with the responsibility for protection of the investors in Treasury securities will lead to an inevitable conflict between two agencies, uncertainty in the market and higher financing costs,” Niehenke said.

He also disagreed that a self-regulatory body should be created to write the rules for government securities dealers.

The Treasury official said the department has been reviewing for many years the question of expanding its book-entry system at the Federal Reserve.

He said the Treasury has been considering a plan to assure all investors that their securities are held by a custodian directly in a securities account at the Federal Reserve.

“Investors now concerned about fraud or failure of any one of the book-entry custodians, including regulated institutions in the many tiers between the investor and the Treasury, would gain confidence from knowing there is just one middleman between them and the Federal Reserve,” Niehenke said.