[Federal Register Volume 76, Number 69 (Monday, April 11, 2011)]
[Notices]
[Pages 20061-20062]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8553]
[[Page 20061]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64191; File No. SR-DTC-2010-15]
Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Approval of a Proposed Rule Change To Amend Rules
Relating to the Requirement To Maintain a Balance Certificate in the
Fast Automated Securities Transfer Program
April 5, 2011.
I. Introduction
On November 5, 2010, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2010-15 pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'').\1\ Notice of the proposal
was published in the Federal Register on November 23, 2010.\2\ The
Commission received two comment letters.\3\ For the reasons discussed
below, the Commission is granting approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 63320 (November 16,
2010), 75 FR 71473 (November 23, 2010).
\3\ Letters from Charles V. Rossi, President, Securities
Transfer Association (December 14, 2010) and Candice Fordin,
Associate Counsel, The Depository Trust & Clearing Corporation
(February 22, 2011).
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II. Description
Under DTC's FAST program, transfer agents participating in FAST
(``FAST transfer agents'') hold DTC securities in the form of balance
certificates.\4\ The balance certificates are registered in the name of
DTC's nominee, Cede & Co., and evidence the record ownership by Cede &
Co. of each issue for which the FAST transfer agent acts as transfer
agent. The Balance Certificate Agreement is executed by each FAST
transfer agent and DTC and sets forth the rights and obligations of
FAST transfer agents and DTC. As additional securities are deposited or
withdrawn from DTC, the appropriate FAST transfer agent adjusts the
denomination of the balance certificate and electronically confirms
theses changes with DTC.
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\4\ FAST reduces the movement of certificates between DTC and
transfer agents, thereby reducing the costs and risks associated
with the creation, movement, and storing of certificates. For a
description of DTC's current rules relating to FAST, see Securities
Exchange Act Release Nos. 34-13342 (March 8, 1977) (File No. SR-DTC-
76-3); 34-14997 (July 26, 1978) (File No. Sr-DTC-78-11); 34-21401
(October 16, 1984) (File No. SR DTC-84-8); 34-31941 (March 3, 1993)
(SR-DTC-92-15); and 34-46956 (December 2, 2002) (File No. SR-DTC
2002-15). In addition, see Securities Exchange Act Release No. 34-
60196 (June 30, 2009) 74 FR 33496 (File No. SR-DTC-2006-16).
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Because transfer agents electronically confirm with DTC the
adjustments to the denomination of the balance certificates and
balances with DTC on a daily basis the number of shares represented by
the balance certificate, some FAST transfer agents requested that DTC
remove the requirement that they custody a balance certificate. As a
result, DTC has proposed to remove the requirement that FAST transfer
agents maintain a balance certificate for only those securities whose
issuers are ``participating'' in the direct registration system
(``DRS'').\5\
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\5\ DRS allows registered owners to hold their assets on the
records of the transfer agent in book-entry form rather than in
certificated form and provides investors with an alternate approach
to holding their securities either in certificated form or in
``street'' name. Securities on deposit at DTC are considered ``DRS
eligible'' if the issuer's by-laws permit the issuance of book entry
shares and the CUSIP number has been designated as FAST eligible by
DTC. ``Participating in DRS'' means that the issuer and its transfer
agent have complied with DTC's requirements to participate in the
DRS program and actually allow investors to hold shares in DRS.
Issuers that participate in DRS have acknowledged that the use of
electronic registration of securities is a valid method to evidence
ownership of their issued securities.
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Accordingly, pursuant to the rule change being approved by this
Order, DTC will remove the requirement that FAST transfer agents
maintain a balance certificate for those exchange listed issues that
are DRS eligible and that are participating in DRS. However, DTC will
continue to reserve its rights to draw down from the FAST balance and
to receive in lieu of a DRS position a certificate registered in DTC's
nominee name of Cede & Co. and reflecting any number of shares up to
and including the total amount of shares due DTC from the FAST transfer
agents.
III. Comment Letters
The Commission received two comment letters, one from the
Securities Transfer Association (``STA'') raising several concerns
about the filing and the other from DTC responding to the STA's
comments.\6\ While the STA strongly supports DTC's proposed rule to
eliminate the requirement for FAST agents to maintain a balance
certificate for issues participating in DRS, the STA believes the
requirement to maintain a balance certificate should also be eliminated
for those issues eligible for DRS but not participating. The STA
reasons that DRS eligible issues can be electronically reflected on the
transfer agent's records and can still be moved electronically through
a Deposit Withdrawal at Custodian transaction (``DWAC'').\7\ The STA
also noted that the proposed requirement that reserves the right for
DTC to request a certificate may be problematic for those issuers that
do not issue certificates.
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\6\ Supra note 3.
\7\ Through DTC's DWAC service, participants are permitted to
make deposits and withdrawals directly with a transfer agent for an
issue evidenced by a balance certificate registered in the name of
Cede & Co. and held for DTC by a transfer agent. Issues eligible
under DTC's Fast Automated Securities Transfer (``FAST'') are
eligible for DTC's DWAC service. For more information about the DWAC
service, see Securities Exchange Act Release No. 30283 (January 23,
1992), 57 FR 3658 (January 30, 1992) (SR-DTC-91-16).
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DTC's comment letter responded to both concerns raised by the STA.
First, DTC contended that companies that have issued securities that
are fully eligible and participating in DRS have authorized the use of
a statement to evidence ownership. Without this authorization by the
issuer, DTC argues, there is no ability to get an electronic statement
from the issuer's transfer agent and therefore no inherent approval of
statement form as a valid evidence of ownership.\8\
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\8\ In addition to the requirement that an issue be eligible and
participating in DRS, DTC's proposed rule change also requires that
issue be exchange traded. The STA did not raise any concerns in its
comment letter regarding this aspect of the proposal. Nonetheless,
DTC stated in its comment letter that by waiving the requirement to
maintain a balance certificate for only those issues that are listed
on an exchange, DTC is able to rely on the due diligence of the
exchange to provide a level of issuer transparency that DTC might
not otherwise be able to attain.
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Second, with regards to the provision of DTC's proposal reserving
the right for DTC to request a certificate, DTC maintained that
currently all issuers eligible and participating in DRS are required to
maintain and provide DTC upon request a FAST balance certificate. DTC
stated that it cannot anticipate every situation that may arise where
it is in DTC's best interest to certificate the FAST balance but there
are times when obtaining a certificate is necessary, such as when the
issuer's transfer agent or the issuer itself no longer meets the
criteria to be in the FAST program.
IV. Discussion
Section 17A(b)(3)(F) of the Act requires, among other things, that
the rules of a clearing agency be designed to assure the safeguarding
of securities and funds which are in the custody or control of the
clearing agency or for which it is responsible.\9\ The Commission finds
that DTC's proposed rule change is consistent with its obligations
under the Exchange Act because it should allow DTC to reduce the costs
and risks associated with the creation, storage, transfer, and
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replacement of physical certificates, specifically in this case the
balance certificates, which should in turn allow DTC to better
safeguard the securities which are in its custody or control or for
which it is responsible.
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\9\ 15 U.S.C. 78q-1(b)(3)(F).
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While the Commission understands the STA would like to further
promote dematerialization by eliminating the need for FAST agents
acting for issues that are eligible but not participating in DRS to
maintain a balance certificate, we agree with DTC that at this time
allowing only those issues where the issuer has expressly provided that
statements are evidence of ownership to eliminate maintaining the
balance certificate better safeguards the securities being custodied by
the FAST agent on DTC's behalf. Furthermore, the proposed rule change
may encourage those issuers that have made their securities eligible
but are not participating in DRS to participate in DRS, which would
further facilitate the STA's goal of reducing the use of physical
certificates.
With regards to the STA's concern that requiring issuers or their
transfer agents to provide a balance certificate upon request, the
proposed rule change does not change DTC's current requirements
relating to certificating FAST balance positions and therefore should
not present any new issues for issuers or FAST transfer agents. DTC was
simply making clear in the proposed rule change that it is continuing
to reserve the right to request such a certificate.
Accordingly, for the reasons stated above the Commission believes
that the proposed rule change is consistent with DTC's obligation under
Section 17A of the Exchange Act, as amended, and the rules and
regulations thereunder.\10\
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\10\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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IV. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
in particular with the requirements of Section 17A of the Act and the
rules and regulations thereunder.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-DTC-2010-15) be and hereby
is approved.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8553 Filed 4-8-11; 8:45 am]
BILLING CODE 8011-01-P