[Federal Register Volume 69, Number 234 (Tuesday, December 7, 2004)]
[Rules and Regulations]
[Pages 70852-70862]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26785]



[[Page 70851]]

-----------------------------------------------------------------------

Part IV





Securities and Exchange Commission





-----------------------------------------------------------------------



17 CFR Part 240



Issuer Restrictions or Prohibitions on Ownership by Securities 
Intermediaries; Final Rule

Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / 
Rules and Regulations

[[Page 70852]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-50758; File No. S7-24-04]
RIN 3235-AJ26


Issuer Restrictions or Prohibitions on Ownership by Securities 
Intermediaries

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting a new rule under the Securities Exchange Act of 1934 
(``Exchange Act'') that prohibits registered transfer agents from 
effecting any transfer of any equity security registered under Section 
12 or any equity security that subjects an issuer to reporting under 
Section 15(d) of the Exchange Act if such security is subject to any 
restriction or prohibition on transfer to or from a securities 
intermediary, such as clearing agencies, banks, or broker-dealers. The 
primary purpose of the rule is to promote the integrity and efficiency 
of the U.S. clearance and settlement system.

DATES: Effective Date: March 7, 2005.

FOR FURTHER INFORMATION CONTACT: Jerry Carpenter, Assistant Director, 
or Susan M. Petersen, Special Counsel, Office of Risk Management, 202/
942-4187, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC, 20549-1001.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    Recently, a number of issuers of equity securities trading in the 
public markets have imposed restrictions on their securities to limit 
or to prohibit ownership of the securities by securities intermediaries 
such as depositories, broker-dealers, and banks. Such restrictions 
require these securities to be certificated and transactions in these 
securities to be manually cleared, settled, and transferred on a 
transaction-by-transaction basis.
    To facilitate the clearance and settlement of securities 
transactions, securities held by a securities intermediary on behalf of 
its customers or another securities intermediary are commonly 
registered in the name of the securities intermediary or in its nominee 
name, which makes the securities intermediary the registered owner.\1\ 
This is often referred to as holding a security in ``street name.'' \2\ 
Holding securities in street name at a securities depository 
facilitates the transfer of negotiable certificates and obviates 
manually processed paperwork and physical delivery of certificates. 
Registered clearing agencies acting as securities depositories help to 
centralize and automate the settlement of securities, in part by 
reducing the physical movement of securities traded in the U.S. markets 
using book-entry movements. On occasion, other types of securities 
intermediaries, such as broker-dealers or banks, may perform similar 
functions by holding a certificate registered in its name but held on 
behalf of its customers.
---------------------------------------------------------------------------

    \1\ The registered owner is the name of the individual 
shareholder recorded on the official records of the issuer 
(sometimes referred to as the record owner or legal owner of the 
securities).
    \2\ In the case of securities held in street name, generally the 
securities are held by a securities depository (e.g., The Depository 
Trust Company) who as the registered owner holds the securities on 
behalf of another securities intermediary (e.g., a broker-dealer or 
bank) who in turn holds the securities for its customers, the 
beneficial owners. All the rights and obligations of the securities 
are passed through the registered owner to the beneficial owners. 
For more information on the relationship between securities 
intermediaries and beneficial owners, see infra note 21.
---------------------------------------------------------------------------

    The use of securities depositories in order to minimize the 
physical movement in connection with the settlement for securities 
traded in the public market is essential to the prompt and accurate 
clearance and settlement of securities transactions.\3\ The effort by 
some issuers to restrict ownership of publicly traded securities by 
securities intermediaries can result in many of the inefficiencies and 
risks Congress sought to avoid when promulgating Section 17A of the 
Exchange Act.\4\ Restrictions on intermediary ownership deny investors 
the ability to use a securities intermediary to hold their securities 
and to efficiently and safely clear and settle their securities 
transactions by book-entry movements.
---------------------------------------------------------------------------

    \3\ Section 17A(e) of the Exchange Act directs the Commission to 
use its authority to end the physical movement of securities 
certificates in connection with the settlement among brokers and 
dealers of transactions in securities. 15 U.S.C. 78q-1(e).
    \4\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    On June 4, 2004, the Commission proposed Rule 17Ad-20 that would 
prohibit registered transfer agents from effecting any transfer of any 
equity security registered under Section 12 or any equity security that 
subjects an issuer to reporting under 15(d) of the Exchange Act \5\ if 
such security is subject to any restriction or prohibition on transfer 
to or from a securities intermediary.\6\ Under the proposed rule, the 
term ``securities intermediary'' would be defined as a clearing agency 
registered under Section 17A of the Exchange Act or a person, including 
a bank, broker, or dealer, that in the ordinary course of its business 
maintains securities accounts for others. As proposed, the rule would 
exclude any equity security issued by a partnership, as defined in Item 
901 of Regulation S-K. For tax or other reasons, partnerships may have 
an appropriate need to restrict ownership and issue a securities 
certificate.
---------------------------------------------------------------------------

    \5\ Pursuant to Section 12(g) of the Exchange Act and the rules 
thereunder, a company must generally register a class of equity 
securities if on the last day of its fiscal year it has total assets 
of more than $10 million and the class is held of record by more 
than 500 persons. 15 U.S.C. 78l(g). Under Section 12(b), all 
securities registered on a securities exchange must also be 
registered with the Commission. 15 U.S.C. 78l(b). Section 15(d) of 
the Exchange Act generally requires a company with an effective 
Securities Act registration statement to file the same periodic 
reports as a company that has a Section 12 registered class of 
securities. 15 U.S.C. 78o(d).
    \6\ Securities Exchange Act Release No. 49809 (June 4, 2004), 69 
FR 32784 (June 10, 2004), [File No. S7-24-04].
---------------------------------------------------------------------------

    The Commission solicited comments on the proposed rule and received 
fourteen comment letters from eleven commenters.\7\ The responses 
varied widely, with three commenters supporting the rule as proposed, 
five commenters opposing the proposal or expressing reservations about 
the proposal until certain preconditions have been met, and three 
commenters not expressing support or opposition but instead raising 
interpretive, operational, or timing concerns with adoption of the 
rule. After carefully considering the comments received, we have 
decided to adopt Rule 17Ad-20 with a minor modification to address 
certain commenter concerns raised relating to private placements and 
certain types of private agreements.
---------------------------------------------------------------------------

    \7\ Letters from David Patch (May 29, 2004, June 7, 2004, and 
August 3, 2004); Glenda King (June 5, 2004); Frederick D. Lipman, 
Esq. (June 10, 2004); Larry E. Thompson, Managing Director and 
Senior Deputy General Counsel, The Depository Trust & Clearing 
Corporation (July 8, 2004, and August 19, 2004); Robert L. Stevens, 
Chairman, X-Clearing Corporation (July 9, 2004); Marc Castonguay, 
Vice President and CEO, Pacific Corporate Trust Company (July 12, 
2004); H. Glenn Bagwell, Jr., Esq. (July 12, 2004); Thomas L. 
Montrone, President and Chief Executive Officer, Registrar and 
Transfer Company (July 16, 2004); Cleary, Gottlieb, Steen & Hamilton 
(July 19, 2004); Ernest A. Pittarelli, Chairman, Securities Industry 
Association (``SIA'') (July 28, 2004), and D. Stuart Bowers, Senior 
Vice President, Legg Mason Wood Walker, Incorporated (July 30, 2004) 
(``Legg Mason'').

---------------------------------------------------------------------------

[[Page 70853]]

II. Background

A. The National System for Clearance and Settlement of Securities 
Transactions

    In Section 17A(a) of the Exchange Act, Congress made findings that 
(1) the prompt and accurate clearance and settlement of securities 
transactions, including the transfer of registered ownership and 
safeguarding of securities and funds related to clearance and 
settlement activities, are necessary for the protection of investors 
and those acting on behalf of investors,\8\ and (2) inefficient 
clearance and settlement procedures impose unnecessary costs on 
investors and those acting on their behalf.\9\ To address these 
concerns, Congress gave the Commission the authority and responsibility 
to regulate, coordinate, and direct the processing of securities 
transactions in order to facilitate the establishment of a national 
system for the prompt and accurate clearance and settlement of 
transactions in securities.\10\ The basic purpose of Section 17A is to 
promote the development of a modern, nationwide system for the safe and 
efficient processing of securities transactions that serves the 
interests of the financial community and the investing public.\11\ 
Congress expressly provided the Commission with jurisdiction over 
clearing agencies \12\ and transfer agents,\13\ as well as other 
participants \14\ in the national system for clearance and 
settlement.\15\ Furthermore, specifically recognizing that the use of 
securities certificates to transfer registered ownership decreases 
efficiency and safety in the capital markets, Congress also directed 
the Commission to end the physical movement of securities certificates 
in connection with the settlement among brokers and dealers.\16\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78q-1(a)(1)(A).
    \9\ 15 U.S.C. 78q-1(a)(1)(B).
    \10\ 15 U.S.C. 78q-1(a)(2)(A)(i). Congress envisioned the 
Commission's authority to extend to every facet of the securities 
handling process involving securities transactions within the United 
States, including activities by clearing agencies, depositories, 
corporate issuers, and transfer agents. See S. Rep. No. 75, 94th 
Cong., 1st Sess. at 55 (1975).
    \11\ See S. Rep. No. 75, 94th Cong., 1st Sess. at 122 (1975).
    \12\ The Exchange Act defines the term clearing agency as any 
person who acts as an intermediary in making payment or deliveries 
or both in connection with transactions in securities or who 
provides facilities for comparison of data respecting the terms of 
settlement of securities transactions, to reduce the number of 
settlements of securities transactions, or for the allocation of 
securities settlement responsibilities. Such term also means a 
person, such as a securities depository, who (i) acts as a custodian 
of securities in connection with a system for the central handling 
of securities whereby all securities of a particular class or series 
of any issuer deposited within the system are treated as fungible 
and may be transferred, loaned, or pledged by bookkeeping entry 
without physical delivery of securities certificates, or (ii) 
otherwise permits or facilitates the settlement of securities 
transactions or they hypothecation or lending of securities without 
the physical delivery of securities certificates. 15 U.S.C. 
78c(a)(23).
    \13\ The Exchange Act defines the term transfer agent generally 
as any person who engages on behalf of an issuer of securities or on 
behalf of itself as an issuer of securities in (A) countersigning 
such securities upon issuance; (B) monitoring the issuance of such 
securities with a view to preventing unauthorized issuance, a 
function commonly performed by a person called a registrar; (C) 
registering the transfer of securities; (D) exchanging or converting 
such securities; or (E) transferring record ownership of securities 
by book-keeping entry without physical issuance of securities 
certificates. 15 U.S.C. 78c(a)(25).
    \14\ Section 17A(f)(1) permits the Commission to adopt rules 
concerning the transfer of securities and the rights and obligations 
of purchasers, sellers, owners, lenders, borrowers, and financial 
intermediaries involved in or affected by such transfers, and the 
rights of third parties whose interests devolve from such transfers. 
15 U.S.C. 78q-1(f)(1).
    \15\ See, e.g., Section 17A(b)(1) of the Exchange Act makes it 
unlawful for any clearing agency, unless registered with the 
Commission, to perform the function of a clearing agency with 
respect to any security other than an exempted security. 15 U.S.C. 
78q-1(b)(1). Section 17A(c)(1) of the Exchange Act, which makes it 
unlawful for any transfer agent, unless registered with the 
Commission, to directly or indirectly perform the function of a 
transfer agent with respect to any security registered under Section 
12 of the Act or which would be required to be registered except for 
the exemption from registration proved by Section 12(g)(2)(B) 
(investment companies) or Section 12(g)(2)(G) (certain securities 
issued by insurance companies). 15 U.S.C. 78q-1(c)(1) and 15 U.S.C. 
78l(a) respectively. Exchange Act Section 17A(d)(1) prohibits any 
registered clearing agency or registered transfer agent from 
engaging in any activity as a clearing agency or transfer agent in 
contravention of rules and regulations as the Commission may 
prescribe as necessary or appropriate in the public interest, for 
the protection of investors or otherwise in furtherance of the 
purposes of the Act. 15 U.S.C. 78q-1(d)(1).
    \16\ 15 U.S.C. 78q-1(e).
---------------------------------------------------------------------------

B. The Role of Securities Intermediaries

    The process for delivering and transferring certificated securities 
is almost entirely manual and as such, is labor-intensive, expensive, 
and time-consuming.\17\ The use of securities certificates can result 
in significant delays and expense in processing securities 
transactions.\18\ Moreover, as negotiable instruments, certificates 
also can be lost, stolen, or forged.\19\ All this adversely affects the 
national system for clearance and settlement. The concern associated 
with lost certificates was dramatically demonstrated after September 
11, 2001, when thousands of certificates at broker-dealers or banks 
(either being held in custody in vaults or being processed for 
transfer) either were destroyed or were unavailable for transfer. 
Certificates have also been identified by the financial services 
industry as an obstacle to achieving streamlined processing (i.e., 
straight-through-processing) and shorter settlement cycles.\20\
---------------------------------------------------------------------------

    \17\ For more information on the costs and risks associated with 
processing certificates, see Exchange Act Release No. 49405 (March 
11, 2004), 69 FR 12922 (March 18, 2004), [File No. S7-13-04] 
(securities transaction settlement concept release).
    \18\ If a broker-dealer is unable to have the security 
reregistered into the name of the buyer or the buyer's securities 
intermediary after trade date, the rejection of the transfer after 
trade date exposes the customer to the costs and risks that she may 
have to buy in the security and exposes the broker-dealer to the 
costs and risks associated with buy-ins. Investors bear direct costs 
as well. Transfer agents require investors to obtain a surety bond 
before the transfer agent will issue a replacement certificate for 
lost and stolen certificates. We understand that generally most 
transfer agents charge investors between 2%-4% of the current market 
value of the securities to obtain a surety bond.
    \19\ In an effort to identify lost, missing, counterfeit, and 
stolen securities, Exchange Act Rule 17f-1 requires, among other 
entities, every exchange, the securities association, broker, 
dealer, transfer agent, registered clearing agency, and many banks 
to report to the Commission or delegee, which currently is the 
Securities Information Center (``SIC''), missing, lost, counterfeit, 
or stolen securities certificates. See 17 CFR 240.17f-1. SIC 
operates a centralized database that records lost and stolen 
securities. When a broker-dealer receives a security certificate to 
sell, the broker-dealer will submit information about the 
certificate to SIC so that SIC may search its database to see if the 
certificate has been reported as missing, lost, stolen, or 
counterfeited. (For more information about SIC, see www.secic.com.)
    \20\ See Exchange Act Release No. 49405 (March 11, 2004), 69 FR 
12922 (March 18, 2004), [File No. S7-13-04] (securities transaction 
settlement concept release).
---------------------------------------------------------------------------

    Securities intermediaries hold securities on behalf of others in 
order to facilitate more efficient clearance and settlement of 
securities transactions by reducing the need to transfer certificates. 
Investors' securities generally are held in the name of a securities 
intermediary, such as a securities depository, broker-dealer, or bank, 
or its nominee, for the benefit of the security intermediary's 
customers. The securities intermediary or its nominee is generally the 
registered owner of the securities while the securities intermediary's 
customer typically is the beneficial owner.\21\

[[Page 70854]]

Securities registered in the name of the securities intermediary or its 
nominee allows the securities to be immobilized \22\ and held in 
fungible bulk \23\ thereby significantly reducing the number of 
certificates that need to be delivered and transferred. This in turn 
reduces the risk and cost associated with transferring the securities. 
Transfers in ownership of securities held in the name of a securities 
intermediary are accomplished by making book-entry adjustments to the 
accounts on the securities intermediary's records.
---------------------------------------------------------------------------

    \21\ The relationship between various levels of securities 
intermediaries and beneficial owners is complex. There may be many 
layers of beneficial owners (some of which may also be securities 
intermediaries) with all ultimately holding securities on behalf of 
a single beneficial owner, who is sometimes referred to as the 
ultimate beneficial owner. For example, an introducing broker-dealer 
may hold its customer's securities in its account at a clearing 
broker-dealer, that in turn holds the introducing broker-dealer's 
securities in an account at DTC. In this context, DTC or its nominee 
is the registered owner and DTC's participants (i.e., broker-dealers 
and banks) are beneficial owners, as are the participants' 
customers. However, DTC, the clearing broker-dealer (the DTC 
participant), and the introducing broker-dealer are all securities 
intermediaries. These distinctions may be important under both 
federal and state law when determining the rights and obligations of 
the parties holding securities on behalf of others.
    \22\ Immobilization of securities occurs where a securities 
depository holds the underlying certificate and transfers of 
ownership are recorded through book-entry movements between the 
depository's participants' accounts. An issue is partially 
immobilized (as is the case with most equity securities traded on an 
exchange or at the NASD) when the street name positions are 
immobilized (i.e., those held through broker-dealers that are 
participants of a depository), but certificates are still available 
to individual shareholders upon request. Dematerialization of 
securities occurs where there are no paper certificates available, 
and all transfers of ownership are made through book-entry 
movements. For more information about immobilization and 
dematerialization, see Exchange Act Release No. 49405 (March 11, 
2004), 69 FR 12922 (March 18, 2004), [File No. S7-13-04].
    \23\ Fungible bulk means that no participant or customer of a 
participant has any claim or ownership rights to any particular 
certificate held by DTC. Rather, participants have a securities 
entitlement to obtain a certificate representing securities held in 
their DTC accounts.
---------------------------------------------------------------------------

    Consistent with Congress' directive to establish a national system 
for clearance and settlement and to decrease the inefficiencies and 
risks associated with processing securities certificates, the 
Commission has long encouraged the use of alternatives to holding 
securities in certificated form. The Commission's approval of the 
registration of securities depositories as clearing agencies in 1983 
constituted an important step in achieving the mandates established by 
Congress by immobilizing securities in a registered clearing agency and 
settling transactions by book-entry movements.\24\ The Commission also 
has approved the rule filings of self-regulatory organizations that 
require their members to use the facilities of a securities depository 
for the book-entry settlement of all transactions in depository-
eligible securities \25\ and that require securities to be made 
depository eligible if possible before they can be listed for 
trading.\26\
---------------------------------------------------------------------------

    \24\ Exchange Act Release No. 20221 (September 23, 1983), 48 FR 
45167 (October 3, 1983), [File Nos. SR-600-5 and 600-19] (order 
approving the clearing agency registration of four depositories and 
four clearing corporations).
    \25\ Exchange Act Release No. 32455 (June 11, 1993), 58 FR 33679 
(June 18, 1993), [File Nos. SR-Amex-93-07; SR-BSE-93-08; SR-MSE-93-
03; SR-NASD-93-11; SR-NYSE-93-13; SR-PSE-93-04; and SR-Phix-93-09)] 
(order approving rules requiring members, member organizations, and 
affiliated members of the New York Stock Exchange, National 
Association of Securities Dealers, American Stock Exchange, Midwest 
Stock Exchange, Boston Stock Exchange, Pacific Stock Exchange, and 
Philadelphia Stock Exchange to use the facilities of a securities 
depository for the book-entry settlement of all transactions in 
depository-eligible securities with another financial intermediary). 
In rare circumstances, DTC will be unable to accept a deposit of a 
security because it is unable to process it. In those cases, the 
rules of the self-regulatory organizations do not require the 
security to be depository eligible.
    \26\ Exchange Act Release No. 35798 (June 1, 1995), 60 FR 30909 
(June 12, 1995), [File Nos. SR-Amex-95-17; SR-BSE-95-09; SR-CHX-95-
12; SR-NASD-95-24; SR-NYSE-95-19; SR-PSE-95-14; SR-PHLX-95-34] 
(order approving rules setting forth depository eligibility 
requirements for issuers seeking to have their shares listed on the 
American Stock Exchange, Boston Stock Exchange, Chicago Stock 
Exchange, National Association of Securities Dealers, New York Stock 
Exchange, Pacific Stock Exchange, and the Philadelphia Stock 
Exchange).
---------------------------------------------------------------------------

    Registered clearing agencies acting as securities depositories 
immobilize securities and centralize and automate securities 
settlements.\27\ Holding securities positions in book-entry form at 
securities depositories reduces the physical movement of publicly 
traded securities in the U.S. markets and significantly improves 
efficiencies and safeguards in processing securities certificates, 
which in turn reduces the costs of those transactions to investors and 
market professionals alike.
---------------------------------------------------------------------------

    \27\ Securities depositories work in conjunction with securities 
clearing corporations. Both types of entities must be registered as 
clearing agencies under Section 17A of the Exchange Act. Clearing 
corporations, such as the National Securities Clearing Corporation, 
serve to compare trades submitted to it by its participants and net 
those trades to a single position at the end of the day. The trade 
position data is then submitted to the depository in order to 
effectuate settlement by debiting or crediting the participants' 
book-entry securities position at DTC and facilitating the payments 
to or from the participants.
---------------------------------------------------------------------------

    The Depository Trust Company (``DTC''), the largest securities 
depository in the world, provides custody and book-entry transfer 
services for the vast majority of securities transactions in the U.S. 
market involving equities, corporate and municipal debt, money market 
instruments, American depositary receipts, and exchange-traded 
funds.\28\ In accordance with its rules, DTC accepts deposits of 
securities from its participants (i.e., broker-dealers and banks),\29\ 
credits those securities to the depositing participants' accounts, and 
effects book-entry movements of those securities.\30\ The securities 
deposited with DTC are registered in DTC's nominee name \31\ and are 
held in fungible bulk for the benefit of its participants and their 
customers.\32\ Each participant having an interest in securities of a 
given issue credited to its account has a pro rata interest in the 
securities of that issue held by DTC.\33\
---------------------------------------------------------------------------

    \28\ Of the four depositories registered as clearing agencies in 
1983, DTC is the only one still operating. DTC estimates that as of 
December 31, 2002, approximately 84% of the shares issued by 
domestic companies listed on the NYSE and 88% of the domestic 
companies listed on the Nasdaq are deposited at DTC. (These 
statistics do not include ADRs.) E-mail from Joseph Trezza, Senior 
Product Manager, DTCC, to the Commission staff (November 14, 2003).
    \29\ In the case of ``book-entry-only'' securities (e.g., no 
securities certificates are available), the issuer will authorize 
DTC to credit the account or accounts of participants with all of 
the issuer's outstanding shares.
    \30\ See, e.g., Rules 5 and 6 of DTC's Rules.
    \31\ DTC registers securities in the name of its nominee, Cede & 
Co., which makes it the registered owner of the securities.
    \32\ Securities deposited at DTC by its participants or the 
issuers in the case of book-entry-only securities are legally or 
beneficially owned by the participants or their customers at the 
time of the deposit and are subsequently transferred into DTC's 
nominee name.
    \33\ While DTC is the registered owner, the participants and 
their customers are the beneficial owners. See supra note 21.
---------------------------------------------------------------------------

    Some securities trading in the public market are not deposited at a 
securities depository because either the securities are not eligible 
for deposit \34\ or the securities intermediary chooses not to deposit 
the securities.\35\ To clear and settle securities transactions without 
the use of a securities depository, broker-dealers must make 
independent arrangements to provide for delivery of securities (in 
certificated form) and payment on a trade-by-trade basis. In cases 
where an issuer has prohibited ownership of their securities by certain 
securities intermediaries, such as DTC, some broker-dealers register 
their customers' positions in the name of the broker-dealer so that 
certificates do not need to be issued for each customer and transferred 
on each trade. However, securities transactions between broker-dealers 
would still have to be manually processed. Thus, clearing and settling 
securities transactions outside of a depository causes greater risks 
and

[[Page 70855]]

inefficiencies, including credit risk issues and risk of defaults, than 
clearing and settling securities transactions within a depository.
---------------------------------------------------------------------------

    \34\ A securities depository determines whether a security is 
eligible for deposit. Certain securities may not be eligible for a 
variety of reasons such as the security cannot conform to the 
depository's processing systems or ownership of the security is 
restricted in such a manner that it cannot be freely transferred. 
See Rule 5 of DTC's Rules.
    \35\ For example, DTC participants may choose not to deposit the 
securities in the depository if the security is not widely traded, 
and instead hold certificated securities registered in the name of 
either the participant's nominee or its customer.
---------------------------------------------------------------------------

C. Need for the Rule

    A small but growing number of issuers whose securities are 
registered under Section 12 or are reporting under Section 15(d) of the 
Exchange Act \36\ recently have restricted, or indicated their 
intention to restrict, ownership of their securities by prohibiting 
their transfer agents from acknowledging ownership of shares registered 
in the name of DTC or by prohibiting transfer of their securities to 
DTC or in some cases to any securities intermediary.\37\ Most, if not 
all, of the issuers restricting ownership of their securities have also 
required that the shares be represented in certificated form.\38\ In 
several cases, the issuer has required the broker-dealer to disclose 
the name of the ultimate beneficial owner before reregistering any 
securities held by the broker-dealer either in the name of the broker-
dealer or in the name of DTC. \39\ Some brokers refused because they 
believed disclosure of the customer's name would violate federal 
securities laws \40\ or contractual obligations to the customer. Other 
broker-dealers could not disclose the name of the ultimate beneficial 
owner because they knew only the identity of their customer and not 
necessarily for whom their customer was holding the securities.
---------------------------------------------------------------------------

    \36\ Supra note 5.
    \37\ See, e.g., www.jagnotes.com; www.nutk.com. Also see 
``Intergold Corporation Announces Custody Only CommonShare Transfer 
System,'' PRNewswire-First Call (January 30, 2003).
    \38\ Id. The certification requirement does not in and of itself 
preclude securities from being deposited at DTC. In fact, DTC's 
nominee owns many of the securities deposited at DTC in certificated 
form, generally by a global or balance certificate.
    \39\ Id. Registration of a transfer is necessary to change 
registered ownership of a security.
    \40\ For example, some broker-dealers have expressed concern 
that such disclosure may cause them to violate Exchange Act Rule 
14b-1 that requires a broker to provide a requesting issuer only 
with the identities of beneficial owners who have not objected to 
disclosures of this information to issuers. 17 CFR 240.14b-1.
---------------------------------------------------------------------------

    Issuers imposing these restrictions, sometimes referred to as 
``custody-only trading,'' frequently state that they are imposing 
ownership or transfer restrictions on their securities to protect their 
shareholders and their share price from ``naked'' short selling.\41\ 
These issuers believe that requiring all securities to be in 
certificated form and precluding ownership by certain securities 
intermediaries forces broker-dealers to deliver certificates on each 
transaction and eliminates the ability of naked short sellers to 
maintain a naked short sale position.\42\
---------------------------------------------------------------------------

    \41\ See Exchange Act Release No. 47978 (June 4, 2003), 68 FR 
35037 (June 11, 2003), [File No. SR-DTC-2003-02] (order approving 
proposed rule change concerning requests for withdrawal of 
certificates by issuers). A short sale is a sale of a security that 
the seller does not own or is effectuated by the delivery of 
borrowed securities. Although ``naked short sale'' is not a defined 
term under federal securities laws, it generally refers to 
situations where a seller sells a security without owning or 
borrowing the security and does not deliver when delivery is due. 
Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 (August 
6, 2004), [File No. S7-23-03] (adoption of Regulation SHO).
    \42\ Id.
---------------------------------------------------------------------------

    A number of these issuers indicated that they had adopted or would 
adopt restrictions, assertedly pursuant to state corporation laws, to 
prohibit ownership of their securities by a depository, securities 
intermediaries, or both.\43\ Issuers' actions to implement the 
restrictions caused numerous clearance and settlement problems. Some of 
these issuers refused to recognize positions that had been registered 
in the name of DTC's nominee or in the name of broker-dealers before 
the adoption of the restriction and refused to transfer (or allow their 
transfer agent to transfer) stock to the name of any entity or person 
that the issuer believed was not the ultimate beneficial owner. Where 
issuers refused to recognize ownership positions registered in the name 
of securities intermediaries, the broker-dealers and banks were forced 
individually to negotiate a solution directly with the issuer.
---------------------------------------------------------------------------

    \43\ See, e.g., www.jagnotes.com; www.nutk.com. Also see 
``Intergold Corporation Announces Custody Only CommonShare Transfer 
System,'' PRNewswire-First Call (January 30, 2003). Previously, some 
issuers sought to withdraw from DTC all securities issued by them 
and indicated that they would not allow their securities to be 
reregistered in the name of DTC. In June 2003, the Commission 
approved a DTC rule change clarifying that DTC's rules and 
procedures provide only for participants (i.e., broker-dealers and 
banks) to submit withdrawal instructions for securities deposited at 
DTC and do not require DTC to comply with withdrawal requests from 
issuers. Exchange Act Release Nos. 47365 (February 13, 2003), 68 FR 
8535 (February 21, 2003), [File No. SR-DTC-2003-02] (notice of 
proposed rule change); 47978 (June 4, 2003), 68 FR 35037 (June 11, 
2003), [File No. SR-DTC-2003-02] (order approving proposed rule 
change concerning requests for withdrawal of certificates by 
issuers).
---------------------------------------------------------------------------

    If securities intermediaries are precluded from having securities 
registered in their names, the securities intermediaries' ability to 
hold and move securities is severely limited. As a result, trading and 
clearance and settlement efficiency suffers, and costs and risks 
increase. This consequence of issuer restrictions is not compatible 
with the Congressional objective that trades in the securities of 
publicly traded companies should be settled through the national system 
for clearance and settlement and benefit from its efficiencies and risk 
reductions and is a significant step backwards in our progress to 
develop the national system. Furthermore, forced certification of 
securities is inconsistent with the industry's goals of streamlining 
processing of securities transactions.\44\
---------------------------------------------------------------------------

    \44\ See Exchange Act Release No. 49405 (March 11, 2004), 69 FR 
12922 (March 18, 2004), [File No. S7-13-04]. See also ``SIA T+1 
Business Case Final Report,'' at 18-21 (August 2000)(``SIA Business 
Case Report''). The report is available online at http://www.sia.com/t_plus_one_issue/pdf/BusinessCaseFinal.pdf.
---------------------------------------------------------------------------

    These types of restrictions have also caused investors increased 
costs and delays. By forcing securities intermediaries to submit 
securities as part of an issuer's recapitalization, the transfer agent 
must transfer the securities by canceling the certificate registered in 
the name of the securities intermediary and re-register a new 
certificate in the name of the beneficial owner. Transfer agent 
registration fees, which may range from $10.00 to $75.00 per transfer, 
and costs for secure delivery of securities certificates, can be more 
than the market value of the securities being processed.\45\ In some 
cases, the broker-dealers assume these costs but in many cases the cost 
is passed along to investors. Broker-dealers that did reregister 
securities received numerous complaints from investors about the fees, 
particularly where the investors had not issued instructions to 
reregister the securities. Where broker-dealers must deliver the 
securities certificates to an issuer's transfer agent and the transfer 
agent similarly must deliver the newly registered certificates, there 
are significant costs and delays in obtaining certificates, which could 
ultimately impede the customers' ability to sell or otherwise negotiate 
the security in the marketplace.
---------------------------------------------------------------------------

    \45\ Only issuers whose securities are trading on the NYSE are 
prohibited from charging transfer or certification fees.
---------------------------------------------------------------------------

III. The Proposed Rule

    On June 4, 2004, the Commission proposed Rule 17Ad-20\46\ that 
would prohibit registered transfer agents \47\ from effecting any 
transfer of any equity security registered under Section 12 or any 
equity security that subjects an issuer to reporting under 15(d) of the 
Exchange Act \48\ if such security is subject to any restriction or 
prohibition

[[Page 70856]]

on transfer to or from a securities intermediary.\49\ Under the 
proposed rule, the term ``securities intermediary'' would be defined as 
a clearing agency registered under Section 17A of the Exchange Act or a 
person, including a bank, broker, or dealer, that in the ordinary 
course of its business maintains securities accounts for others. As 
proposed, the rule would exclude any equity security issued by a 
partnership, as defined in Item 901 of Regulation S-K.\50\
---------------------------------------------------------------------------

    \46\ Securities Exchange Act Release No. 49809 (June 4, 2004), 
69 FR 32784 (June 10, 2004), [File No. S7-24-04].
    \47\ Supra note 13. Issuers acting as their own transfer agent 
would be subject to Rule 17Ad-20.
    \48\ Supra note 5.
    \49\ Supra note 15.
    \50\ Item 901(b)(1) defines the term partnership to mean any: 
(i) Finite-life limited partnership or (ii) other finite-life 
entity. 17 CFR 229.901(b)(1). The Commission has the authority under 
Section 36 of the Exchange Act to conditionally or unconditionally 
exempt any security or class of securities from the provisions of 
the Exchange Act to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors. 15 U.S.C. 78mm(a)(1).
    For tax or other reasons, partnerships may have an appropriate 
need to restrict ownership and issue a securities certificate. A 
``publicly traded partnership'' as defined in Section 7704 of the 
Internal Revenue Code is subject to treatment as a corporation 
rather than a partnership for tax purposes. 26 CFR 1.7704-1.
---------------------------------------------------------------------------

IV. Comment Letters

    As noted above, the Commission received fourteen comment letters 
from eleven commenters in response to the proposed rule.\51\ Three 
commenters submitting four letters supported the proposal in its 
current form.\52\ The SIA stated that precluding securities 
intermediaries from having securities registered in their own name will 
increase the use of securities certificates and thereby will increase 
the costs and risks associated with processing these certificates. Legg 
Mason stated in its comment letter that it concurred with the SIA's 
comment. They noted that the use of certificates adversely affects the 
clearance and settlement system and undermines the industry's long-term 
efforts to streamline securities processing and achieving straight-
through processing in the U.S.
---------------------------------------------------------------------------

    \51\ Supra note 7.
    \52\ Letters from the SIA, Legg Mason, and DTC.
---------------------------------------------------------------------------

    DTC noted in its support for Rule 17Ad-20 that some issuers have 
refused to process or return shares presented by DTC for transfer or 
have significantly delayed transfer.\53\ In many cases, DTC asserts, 
issuers' actions have resulted in the suspension of clearance and 
settlement services, and thereby have delayed or prevented the 
settlement of trades and ultimately disrupted the national system for 
clearance and settlement. While some issuers have claimed they have the 
right to control the disposition of securities trading in the public 
market and have directed that shares owned by and registered in the 
name of DTC's nominee be surrendered, DTC contends that issuers do not 
have continuing ownership rights in securities they have sold into the 
marketplace and that attempts to exercise control is improper and may 
constitute conversion. As such, DTC believes Rule 17Ad-20 will prevent 
transfer agents from aiding and abetting wrongful conduct by certain 
issuers that interferes with the exercise by DTC and by its 
participants of their duties to securityholders with respect to 
securities deposited at DTC.
---------------------------------------------------------------------------

    \53\ Letter from DTC (July 8, 2004).
---------------------------------------------------------------------------

    DTC submitted a second comment letter \54\ to address one commenter 
who opposed the adoption of Rule 17Ad-20 and who criticized the 
National Securities Clearing Corporation's (``NSCC'') \55\ stock borrow 
program because he believed that the stock borrow program facilitated 
naked short selling by allowing broker-dealers to trade more shares 
than have been issued.\56\ DTC stated that the program was implemented 
in order to satisfy its members' priority needs for stock that the 
members do not receive because of fails, and therefore the program 
facilitates the settlement of securities transactions.\57\ DTC further 
stated that shares must be on deposit at DTC and that the lender cannot 
loan shares multiple times.
---------------------------------------------------------------------------

    \54\ Letter from DTC (August 19, 2004).
    \55\ NSCC is an affiliate of DTC and is a registered clearing 
agency that maintains a book-entry accounting system that 
centralizes the settlement of compared security transactions and 
maintains an orderly flow of security and money balances.
    \56\ Letter from H. Glenn Bagwell.
    \57\ NSCC's Stock Borrow Program was approved by the Commission. 
Securities Exchange Act Release No. 17422 (December 29, 1980), 46 FR 
3104 (January 13, 1981).
---------------------------------------------------------------------------

    Five commenters submitting seven comment letters were either 
against adoption of the proposal or expressed reservations about 
adopting such a rule until certain preconditions were met.\58\ One of 
the five commenters opposed the adoption of the proposed rule for a 
variety of reasons, including that adoption of the rule would remove 
the ``self help'' measure issuers were using to protect themselves 
against the negative effects of naked short selling.\59\ Another 
commenter opposed to adoption of Rule 17Ad-20 expressed her belief that 
it was important to be able to register shares in her own name and to 
obtain certificates.\60\
---------------------------------------------------------------------------

    \58\ Letters from David Patch, Glenda King, Frederick D. Lipman, 
X-Clearing Corporation, and H. Glenn Bagwell.
    \59\ Letter from David Patch.
    \60\ Letter from Glenda King.
---------------------------------------------------------------------------

    One of these commenters opposed to adoption of Rule 17Ad-20 
believed that adoption of the rule raises state law concerns.\61\ This 
commenter stated that restrictions on transfer, as well as the rights 
of a corporation and its securityholders, are a matter of state law and 
that by prohibiting transfer agents from effecting certain transfers, 
the rule circumvents the rights of issuers to ``control its own destiny 
and protect its shareholders.'' \62\
---------------------------------------------------------------------------

    \61\ Letter from X-Clearing Corporation.
    \62\ Id.
---------------------------------------------------------------------------

    Three of these commenters believe that certain preconditions should 
be met before Rule 17Ad-20 is adopted.\63\ Two of these commenters 
believe the Commission should develop an effective program to prevent 
naked short selling before limiting the efforts of small companies to 
prevent naked short selling and to reasonably guarantee the 
``integrity'' of the U.S. clearance and settlement system, including 
the alleged problems relating to ``DTC's stock borrow program,'' which 
they believe facilitates naked short selling.\64\ One commenter also 
recommended, without addressing legal and regulatory concerns, that 
issuers should be able to require that their securities be cleared and 
settled through the issuer or other alternative means and that the 
proposed rule be amended to provide an exception to allow the issuer to 
do so if it can demonstrate the capability to settle transactions in 
electronic book-entry form.\65\
---------------------------------------------------------------------------

    \63\ Letters from David Patch, H. Glenn Bagwell, and Frederick 
D. Lipman.
    \64\ Letters from H. Glenn Bagwell, and Frederick D. Lipman. One 
of these commenters maintained that state corporation laws generally 
permit corporations to establish the number of authorized shares in 
their certificates or articles or incorporation and authorize the 
board of directors to issue those shares. Naked short selling, this 
commenter contends, can increase the supply of shares beyond those 
authorized, thereby undermining the board's authority under state 
law to control the number of outstanding shares. Another commenter 
alluded to this issue when he noted that Regulation SHO indicated 
that in some cases settlement failure exceed the public float. 
Letter from David Patch (August 16, 2004). The Commission recently 
adopted Regulation SHO that addresses certain concerns relating to 
naked short selling. Exchange Act Release No. 50103 (July 28, 2004), 
69 FR 48008 (August 6, 2004), [File No. S7-23-03]. See Section IV 
for further discussion on Regulation SHO.
    \65\ Letter from X-Clearing Corporation.
---------------------------------------------------------------------------

    Three commenters did not express their support for or opposition to 
the adoption of Rule 17Ad-20 but instead raised interpretive, 
operational, or timing issues with the proposal.\66\ Two of these 
commenters suggested the proposed the rule should not be adopted

[[Page 70857]]

until after Regulation SHO has become effective to ensure that the 
rules have effectively dealt with the naked short selling problem and 
therefore have eliminated the issuers' need to impose restrictions on 
ownership by or transfer to securities intermediaries.\67\ Another 
commenter expressed concern that adoption of Rule 17Ad-20 may lead to 
unintended consequences. \68\ This commenter argued that by prohibiting 
transfer agents from following the directions of issuers, the rule 
could force issuers to terminate their current transfer agent and 
assume the processing responsibilities as ``self agents,'' which may 
lead to a deterioration of recordkeeping and shareholder services.
---------------------------------------------------------------------------

    \66\ Letters from Pacific Corporate Trust Company, Registrar and 
Transfer Company, and Cleary, Gottlieb, Steen & Hamilton.
    \67\ Letters from Pacific Corporate Trust Company and Registrar 
and Transfer Company. The compliance date for the relevant 
provisions of Regulation SHO designed to address naked short selling 
problems is scheduled for January 3, 2005. Exchange Act Release No. 
50103 (July 28, 2004), 69 FR 48008 (August 6, 2004), [File No. S7-
23-03].
    \68\ Letter from Registrar and Transfer Company.
---------------------------------------------------------------------------

    One of these three commenters expressed concerns that adoption of 
Rule 17Ad-20 as proposed may unintentionally result in prohibiting 
certain restrictions on transfers that were never intended to be 
covered by the rule.\69\ The commenter contended that, as currently 
worded, the rule would not only cover ``custody-only'' trading 
restrictions on equity securities but would also prohibit issuers from 
issuing equity securities of the same class that are ``subject to'' 
transfer restrictions that may be imposed for a variety of commercial 
reasons, such as escrow arrangements, collateral security arrangements, 
and the issuance of equity securities in private placements. This 
commenter suggested that any restriction or prohibition on transfer be 
exempt from the rule when the same class of securities is eligible for 
clearance through a securities intermediary.
---------------------------------------------------------------------------

    \69\ Letter from Cleary, Gottlieb, Steen & Hamilton.
---------------------------------------------------------------------------

V. Discussion

A. Adoption of the Rule

    After considering the comments received, the Commission is adopting 
proposed Rule 17Ad-20, with one minor modification. In response to the 
concern raised by one commenter that Rule 17Ad-20 might unintentionally 
result in prohibiting transfers that were not intended to be covered by 
the rule (e.g., restrictions imposed by private placements or 
restrictions resulting from private agreements between shareholders), 
the Commission is modifying Rule 17Ad-20(a) to prohibit transfer agents 
\70\ from transferring \71\ any equity security registered under 
Section 12 or any equity security that subjects an issuer to reporting 
under Section 15(d) of the Act \72\ if such security is subject to any 
restriction or prohibition on transfer to or from a securities 
intermediary ``in its capacity as such.'' Restrictions imposed by 
private placements or in private agreements generally do not permit 
transfers to anyone but those permitted to purchase or own the 
securities, as specified under federal law or by private agreements. By 
modifying Rule 17Ad-20(a), the Commission is making clear that the rule 
applies only to restrictions or prohibitions imposed by issuers on 
transfers of their publicly traded securities to or from those 
securityholders that are securities intermediaries and are not the 
ultimate beneficial owners.\73\ As a result, the rule does not apply to 
situations such as restrictions imposed by issuers in order to prevent 
an unregistered distribution or other violation of federal securities 
laws, or to effectuate private agreements.
---------------------------------------------------------------------------

    \70\ Supra notes 13 and 15. All transfer agents that are 
required to register as such pursuant to Section 17A(c) of the 
Exchange Act, whether they are in fact registered or not, must 
comply with Rule 17Ad-20 and all other applicable transfer agent 
rules.
    \71\ The term ``transfer'' means (1) delivery of the security 
(i.e., the certificate, or in the case of book-entry, an 
instruction) (2) a volitional act by the transferor which manifests 
an intent to change ownership or convey a security interest and, (3) 
reregistration of ownership. Egon Guttman, Modern Securities 
Transfers section 6:2, at 6-4 (3d ed. 2002).
    \72\ 15 U.S.C. 78l and 15 U.C.C. 78o(d) respectively.
    \73\ The rule will apply even if a restriction or prohibition 
does not expressly state that transfer to or ownership by securities 
intermediaries is restricted or prohibited. For example, the rule 
would apply to securities where the issuer permits transfer to or 
ownership by only the ``ultimate beneficial owner.''
---------------------------------------------------------------------------

    Restrictions on transfer or ownership imposed by issuers subsequent 
to the purchase of securities by investors in the public market raise a 
number of legal and regulatory concerns. A number of issuers have 
received but refused to allow transfer and return of securities 
registered in DTC's nominee name, which in some cases has constituted 
DTC's entire position.\74\ DTC and its participants have expended 
significant resources in attempting to negotiate resolutions with these 
issuers and their transfer agents. In many cases, the issuers' refusal 
to return the shares has resulted in the suspension of clearance and 
settlement services for the issuers' securities, which in some cases 
has resulted in problems in clearing and settling trades. The 
difficulty in obtaining access to securities deposited at DTC but 
withheld by an issuer or its transfer agent and the difficulty in 
obtaining timely transfers through the transfer agent have caused some 
broker-dealers to discontinue buying or selling these issuers' 
securities on behalf of their customers.
---------------------------------------------------------------------------

    \74\ When a broker-dealer participant or its customer requests a 
certificate for a position maintained at DTC, the broker-dealer 
participant submits a ``Withdrawal by Transfer'' instruction to DTC, 
which in turn sends the appropriate transfer agent a certificate 
representing all or a portion of DTC's position. The transfer agent 
registers the number of shares in the customer's name as instructed 
by DTC and then reregisters the remainder of the shares in DTC's 
nominee name. The transfer agent sends the broker-dealer or the 
customer his or her shares and sends DTC the balance of its shares.
---------------------------------------------------------------------------

    We believe that restrictions on transfer of publicly traded 
securities to securities intermediaries are inconsistent with Section 
17A of the Exchange Act. Transactions settled outside of a registered 
clearing agency have to be certificated and then processed manually on 
a transaction-by-transaction basis, which creates inefficiencies, 
risks, and added costs in clearing and settling securities transactions 
and in transferring securities ownership. Furthermore, restrictions 
that force investors to clear and settle their securities outside the 
national system for clearance and settlement require shareholders to 
assume these increased costs and risks. Investors and market 
participants should be permitted to hold securities in street name and 
avail themselves of the benefits of the national system for clearance 
and settlement if they so choose.
    The use of the national system for clearance and settlement, and 
more specifically, the use of clearing agencies, does not hamper an 
investors' ability to register securities in their own name or obtain 
certificates, provided that the issuer allows for certificated 
positions.\75\ Generally, an investor who wants an individually 
registered position in certificate form can instruct her broker-dealer 
to register the securities in her name and issue a certificate.
---------------------------------------------------------------------------

    \75\ State law determines if an issuer is required to issue 
certificates and the conditions to such issuance. Some states, such 
as New York, permit issuers to issue securities in book-entry form 
only (i.e., in dematerialized form).
---------------------------------------------------------------------------

    While we understand that restrictions on transfer to intermediaries 
reflect issuer attempts to address what they believe to be illegal 
naked short selling, the Commission does not believe that naked short 
selling concerns should be addressed by restrictions on transferability 
of securities that trade in the public markets. Restrictions on 
transferability to securities intermediaries results in the stock being

[[Page 70858]]

less liquid, and in the risks, inefficiencies, and costs described 
above, and are not compatible with the structure or goals of the 
national system for clearance and settlement.
    We also note that the Commission recently adopted Regulation SHO to 
address many of the problems associated with naked short selling.\76\ 
As adopted, Rule 203 of Regulation SHO creates a uniform Commission 
rule requiring broker-dealers, prior to effecting short sales in all 
equity securities, to ``locate'' securities available for borrowing and 
imposes additional delivery requirements on broker-dealers for 
securities in which a substantial amount of failures to deliver have 
occurred (i.e., threshold securities).\77\ The Commission believes that 
the requirements in Regulation SHO will reduce short selling abuses and 
will act as a restriction on naked short selling.
---------------------------------------------------------------------------

    \76\ Securities Exchange Act Release No. 50103 (July 28, 2004), 
69 FR 48008 (August 6, 2004), [File No. S7-23-03].
    \77\ Id. Regulation SHO requires broker-dealers to comply with 
the locate, borrow and delivery requirements by January 3, 2005.
---------------------------------------------------------------------------

    We also do not believe that it is either necessary or prudent to 
delay the adoption of this rule until after Regulation SHO has been in 
effect for some period of time or until after its effect on naked short 
selling is determined, as some commenters have suggested.\78\ Any delay 
would continue to expose investors to increased costs and risks that 
come from exclusion of their securities from the national system for 
clearance and settlement.\79\
---------------------------------------------------------------------------

    \78\ Letters from Pacific Corporate Trust Company and Registrar 
and Transfer Company.
    \79\ The compliance date for the relevant provisions of 
Regulation SHO designed to address naked short selling problems is 
scheduled for January 3, 2005. Exchange Act Release No. 50103 (July 
28, 2004), 69 FR 48008 (August 6, 2004), [File No. S7-23-03].
---------------------------------------------------------------------------

    One commenter raised concerns that adoption of the rule would 
impede issuers' or securityholders' rights under state law.\80\ As 
discussed more fully above, in adopting Section 17A of the Exchange 
Act, Congress directed the Commission to use its authority to 
facilitate the establishment of the national system for clearance and 
settlement, including the regulation of clearing agencies and transfers 
agents. In using its authority under the Exchange Act to adopt Rule 
17Ad-20, the Commission is following this Congressional mandate by 
facilitating access to the national system for clearance and settlement 
that is not impeded by restrictions on transfers to or from securities 
intermediaries. Rule 17Ad-20 does not prevent issuers from restricting 
or prohibiting transfer to or ownership by securities intermediaries. 
Rather, the rule addresses transfer agents' ability to effect transfers 
of equity securities that are required to register or report under 
Exchange Act and have restrictions or prohibitions on transfer to 
securities intermediaries. Accordingly, Rule 17Ad-20 is designed to 
prohibit registered transfer agents from transferring equity securities 
that are encumbered by restrictions that are inconsistent with the 
operation of the national system for clearance and settlement and the 
congressional mandate to end the physical movement of securities 
certificates.
---------------------------------------------------------------------------

    \80\ Letter from X-Clearing Corporation.
---------------------------------------------------------------------------

    Finally, one commenter suggested that because of Rule 17Ad-20 some 
issuers should be permitted to or may decide to use alternative 
securities transfer, clearance, and settlement mechanisms, including 
performing these functions internally.\81\ Issuers contemplating 
following this course of action must consider, among other provisions, 
that Section 17A(b)(1) of the Exchange Act makes it unlawful for any 
entity, including an issuer, to act as a clearing agency \82\ without 
registering with the Commission as a clearing agency.\83\ Similarly, in 
response to the commenter who raised concerns that some issuers may 
terminate their transfer agent and instead perform these functions 
internally,\84\ Section 17A(c) of the Exchange Act requires any entity 
acting as a transfer agent, including an issuer,\85\ for a security 
registered under Section 12 of the Exchange Act to register as a 
transfer agent.\86\ An issuer acting as its own transfer agent would, 
therefore, have to register as a transfer agent and would become 
subject to Rule 17Ad-20.
---------------------------------------------------------------------------

    \81\ Id.
    \82\ 15 U.S.C. 78c(a)(23).
    \83\ 15 U.S.C. 78q-1(b)(1).
    \84\ Letter from Registrar and Transfer Company.
    \85\ 15 U.S.C. 78c(a)(25).
    \86\ 15 U.S.C. 78q-1(c)(1).
---------------------------------------------------------------------------

B. Scope and Effective Date

    The Commission believes that adoption of Rule 17Ad-20 advances the 
goals of the national system for clearance and settlement by requiring 
publicly traded equity securities to be eligible for clearance and 
settlement through the national system and by allowing investors and 
securities intermediaries the choice as to how to hold their 
securities. Therefore, the Commission is applying the rule to all 
equity securities, except those specifically excluded from Rule 17Ad-
20, that either are registered pursuant to Section 12 of the Exchange 
Act or subject an issuer to reporting under Section 15(d) of the 
Exchange Act. In order to provide sufficient notice and opportunity for 
issuers to remove restrictions from securities if they so choose and 
for transfer agents to make sure they are in compliance with the rule, 
the Commission is providing for a compliance date of March 7, 2005.

VI. Paperwork Reduction Act

    Rule 17Ad-20 does not contain new ``collection of information'' 
requirements within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\87\ Accordingly, the PRA is not applicable to the adoption 
of the rule because it does not impose any new collection of 
information requirements that would require approval of the Office of 
Management and Budget (``OMB'').
---------------------------------------------------------------------------

    \87\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

VII. Costs and Benefits of Proposed Rule

    We are sensitive to the costs and benefits of our rules and we have 
considered the costs and benefits of Rule 17Ad-20. To assist us in 
evaluating the costs and benefits, in the proposing release we 
encouraged commenters to discuss any cost or benefits that the rule 
might impose. In particular, we requested comment on three major areas. 
First, we requested comment on the potential costs for any for any 
modification to computer systems, operations, or procedures the 
proposed rule may require, as well as any potential benefits resulting 
from the proposal for investors, securities intermediaries (including, 
but not limited to, broker-dealers, depositories, and banks), transfer 
agents, other securities industry professionals, and others. Second, we 
sought comments, analysis, and empirical data on the extent to which 
the proposed rule would benefit investors by reducing costs associated 
with issuer-imposed restrictions on transferring securities to or from 
securities intermediaries and comment and data on the benefits to 
investors of the proposed rule to the extent it precludes decreased 
liquidity, increased risk, and increased transaction costs that may be 
associated with such issuer-imposed restrictions on securities. And 
third, we solicited data on the potential benefits that may accrue due 
to a reduction in production, transfers, and processing of 
certificates, and the increased use of a depository. Commenters were 
requested to provide analysis and data to support their views on the 
costs and benefits associated with proposed Rule 17Ad-20. We

[[Page 70859]]

received no comments providing cost or benefit estimates, but received 
comments on the potential economic impact generally of the proposed 
rule.

A. Benefits

    By prohibiting registered transfer agents from effecting a transfer 
in any equity security registered under Section 12 or in any equity 
security that subjects an issuer to reporting under Section 15(d) that 
restricts or prohibits transfers to or from securities intermediaries, 
proposed Rule 17Ad-20 would allow investors to clear and settle their 
securities transactions through the national system for clearance and 
settlement and thereby take advantage of benefits of that system. We 
believe that the use of the national system, which can only be accessed 
through securities intermediaries, provides significant benefits to 
U.S. investors, brokers, dealers, other securities intermediaries, and 
issuers, by increasing efficiencies and reducing risks associated with 
processing, transferring, and settling securities certificates. While 
some of these benefits may not be readily quantifiable in terms of 
dollar value, particularly those related to risk reduction, we 
nonetheless believe that investors and broker-dealers who choose to use 
the national system for clearance and settlement will lower their 
transactions costs and realize a reduction in certain risks related to 
settlement of securities transactions and transfer of securities to 
registered ownership.
    Issuers restricting transfers of their securities to or from 
securities intermediaries are causing investors to have to certificate 
their positions, which must be reregistered after every purchase or 
sale transaction. The Securities Industry Association (``SIA'') 
estimated that the annual direct and indirect cost of processing and 
transferring certificates in the U.S. market, including those related 
to shipping, signature guarantees,\88\ transfer fees, custody, and 
manual processing, exceeds $234,000,000.\89\ Costs and risks associated 
with missing, lost, counterfeit, or stolen certificates are also 
significant. Between 1996 and 2000, the SIA estimated that an average 
of 1.7 million certificates were reported lost or stolen.\90\ In 2001, 
that figure increased to 2.5 million certificates.\91\ Reporting 
missing, lost, stolen, or counterfeit securities certificates to SIC, 
determining negotiability of these certificates, and paying for surety 
bonds for lost certificates costs the financial industry and investors 
millions of dollars each year.\92\ In recent years, the fraudulent 
resale and fraudulent collateralization of cancelled certificates 
(certificates with no resale value) alone have cost investors and 
financial institutions millions of dollars.\93\
---------------------------------------------------------------------------

    \88\ Every endorsement of a securities certificate requires a 
signature guarantee by an acceptable guarantor. Securities Transfer 
Association Rule Book, Section 1.02 (1998). The Uniform Commercial 
Code that states that a signature guarantee is a warranty by the 
signature guarantor that, among other things, the endorser is an 
appropriate person to endorse and thus the transfer the security. 
UCC 8-312.
    \89\ Letter to Robert L.D. Colby, Deputy Director, Division of 
Market Regulation, Commission, from Donald Kittell, Executive Vice 
President, SIA (August 20, 2003); letter to Annette Nazareth, 
Director, Division of Market Regulation, Commission, from Donald 
Kittell, Executive Vice President, SIA (March 24, 2003) (``Nazareth 
Letter''). These letters advocate the need to dematerialize the U.S. 
market.
    \90\ Id. The SIA's statistics on securities reported lost and 
stolen were obtained by the SIA directly from SIC.
    \91\ Id.
    \92\ Nazareth Letter. Investors who have either lost their 
certificates or had the certificates stolen generally must obtain a 
surety bond before the transfer agent will register a transfer of 
ownership in order to protect the transfer agent from the risk of 
wrongful transfers in the event that the lost or stolen certificates 
reappear at a later date. We understand that generally most transfer 
agent charge investors 2%-4% of the current market value of the 
securities for such a bond.
    \93\ See Exchange Act Release No. 48931 (December 16, 2003), 68 
FR 74390 (December 23, 2003), [File No. S7-18-00] (adopting rule 
relating to certificate destruction).
---------------------------------------------------------------------------

    Furthermore, the process of manually transferring securities 
transactions on an individual trade basis through the transfer agent 
causes significant delays in settling securities transactions and 
registering ownership. These delays may prevent investors from 
effecting timed transactions in the market. All of these costs and 
risks are ultimately borne by investors. The Commission believes the 
costs and risks are substantially reduced or even eliminated through 
the use of book-entry transfers and automated settlement at a 
securities depository.
    DTC and a number of broker-dealers have informed the Commission 
that they have had to undertake special communications with investors 
and institute manual processing in order to exit securities positions 
from DTC (or any other intermediary position) and to accommodate 
issuers' requests to certificate positions in the name of the ultimate 
beneficial owner. The Commission believes that by adopting Rule 17 Ad-
20, investors and industry participants may realize cost savings and 
other potential benefits resulting from not having to undertake these 
communication and manual processing expenses.

B. Costs

    The Commission believes that Rule 17Ad-20 will impose minimal, if 
any, cost to registered transfer agents complying with the rule. To 
date, we have identified one cost relating to the handling, shipping, 
or insurance costs associated with the repackaging and returning non-
transferable certificates. One transfer agent estimated this cost to be 
approximately $22.50 per certificate.\94\ We are unable to estimate the 
total cost because transfer agents have no way of knowing how many, if 
any, of the issuers for whom they currently act as transfer agents 
would retain the restriction, and thereby incur the costs associated 
with returning non-transferable securities. Furthermore, we believe 
that many registered transfer agents would not act as transfer agent 
for an issuer that imposed restrictions subject to Rule 17Ad-20.
---------------------------------------------------------------------------

    \94\ Telephone conversation with Charlie Rossi, Division 
President, Equiserve, on October 1, 2004. The latest data showed an 
increase from an estimated cost of $5.00 indicated in the proposing 
release to $22.50 due to the results of a cost analysis performed by 
Equiserve. Most of the increase was associated with the manual 
process of scanning the certificate, ensuring appropriateness of the 
rejection, and communicating with the securityholders to explain the 
rejection.
---------------------------------------------------------------------------

    Rule 17Ad-20 will require registered transfer agents to determine 
whether or not securities subject to the rule could be eligible for 
transfer prior to effecting a transfer and whether the person or class 
of persons restricted from ownership by the issuer are securities 
intermediaries. We understand that transfer agents routinely make the 
determinations as to restrictions on the securities prior to accepting 
an agency appointment. Accordingly, we do not believe that any 
additional operational or procedural changes would be needed to be made 
to comply with Rule 17Ad-20.
    The Commission understands that some issuers might believe that the 
rule removes a mechanism by which they believe they can counter the 
negative effects of naked short selling in general, and manipulative 
naked short selling in particular.\95\ As has been contended in comment 
letters to the Commission, by requiring these securities to participate 
in the national system for clearance and settlement, it has been 
alleged that both issuers and investors will suffer losses due to the 
diminution in the market value of these securities caused by naked 
short selling or by adverse effects on ownership (e.g., market value 
and voting rights) stemming from such short

[[Page 70860]]

sale transactions.\96\ The Commission is addressing these issues 
through oversight and regulation \97\ rather than issuers attempting to 
control the ownership or transfer of securities that trade in the 
public market, which conflicts with Congress' goals in enacting Section 
17A of the Exchange Act. As stated earlier in this release, we believe 
issuer-imposed restrictions on securities often make the stock less 
liquid, causing reduction in the trading volume of the securities. 
Costs of imposing such restrictions can exceed the market value of the 
securities being processed. Under all of these circumstances, to the 
extent that there is any diminution of issuers' abilities to counter 
the perceived negative effects of naked short selling by restricting or 
prohibiting ownership or transfer by securities intermediaries, we 
believe the cost is justified by the benefits of the national system 
for clearance and settlement.\98\
---------------------------------------------------------------------------

    \95\ Letter from David Patch. Also see Exchange Act Release No. 
47978 (June 4, 2003), 68 FR 35037 (June 11, 2003), [File No. SR-DTC-
2003-02].
    \96\ Id.
    \97\ Exchange Act Release No. 50103 (July 28, 2004), 69 FR 48008 
(August 6, 2004), [File No. S7-23-03].
    \98\ As noted above, most securities trading on an exchange or 
Nasdaq are already subject to SRO rules that require depository 
eligibility. See supra notes 25 and 26.
---------------------------------------------------------------------------

VIII. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) the of the Exchange Act,\99\ as amended by the 
National Securities Markets Improvement Act of 1996,\100\ provides that 
whenever the Commission is engaged in rulemaking and is required to 
consider or to determine whether an action is necessary or appropriate 
in the public interest, it must also consider whether the action will 
promote efficiency, competition, and capital formation. Section 
23(a)(2) of the Exchange Act requires the Commission, in adopting rules 
under the Exchange Act, to consider the anti-competitive effects of any 
rule it adopts. Exchange Act Section 23(a)(2) prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
---------------------------------------------------------------------------

    \99\ 15 U.S.C. 78c.
    \100\ Pub. L. 104-290, 110 Stat. 3416 (1996).
---------------------------------------------------------------------------

    The Commission's view is that Rule 17Ad-20 would promote the 
objectives of the national system for clearance and settlement as 
established in Section 17A of the Exchange Act by allowing securities 
intermediaries and their customers effecting securities transactions in 
the public market to benefit from the increased efficiencies and risk 
reduction afforded by the national system for clearance and settlement. 
By prohibiting restrictions on transfers to and from securities 
depositories and other intermediaries, Rule 17Ad-20 should promote 
efficiency by reducing some of the costs and delays associated with the 
clearance and settlement of securities transactions and promote capital 
formation by making it easier for the securities to be traded in the 
marketplace.
    Rule 17Ad-20 also should enhance competition. While most companies 
listed on a national exchange or Nasdaq are already subject to rules 
that in essence prohibit restrictions on transfers to or from 
securities intermediaries,\101\ those issues trading in the non-
national market and not subject to any listing requirements have not 
been subject to this restriction, such as those securities trading in 
the Pink Sheets. Rule 17Ad-20 would help to level the playing field by 
extending these obligations to all companies issuing equity securities 
that are registered under Section 12 or that subject issuers to 
reporting under Section 15(d) of the Exchange Act and transferred by a 
registered transfer agent.\102\ In doing so, the rule should also 
promote liquidity in these securities by removing barriers to ownership 
of securities and decreasing transaction costs, thereby facilitating 
increased efficiency and capital formation.
---------------------------------------------------------------------------

    \101\ See supra notes 25 and 26.
    \102\ As noted above, the proposed rule would not apply to 
equity securities of issuers subject to Section 15(d) that are 
transferred by transfer agents that are not required to be 
registered under Section 17A of the Exchange Act.
---------------------------------------------------------------------------

IX. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with 5 U.S.C. 604. This FRFA relates to the 
adoption of Rule 17Ad-20 under the Exchange Act of 1934 (``Act''),\103\ 
which prohibits registered transfer agents from transferring any equity 
security registered pursuant to Section 12 of the Act or any equity 
security that subjects an issuer to reporting under Section 15(d) of 
the Act \104\ if such security is subject to any restriction or 
prohibition on transfer to or from a securities intermediary in its 
capacity as such. Under the rule, the term ``securities intermediary'' 
is defined as a clearing agency registered under Section 17A of the 
Exchange Act or a person, including a bank, broker, or dealer, that in 
the ordinary course of its business maintains securities accounts for 
others. The Commission is excluding from Rule 17Ad-20 any equity 
security issued by a partnership, as defined in Item 901 of Regulation 
S-K.\105\ A Summary of the Initial Regulatory Flexibility Analysis was 
published in the proposing release.\106\ The IRFA, which was prepared 
in accordance with 5 U.S.C. 603, is available for inspection at the 
Commission's Public Reference office, 450 5th Street, NW., Washington, 
DC 20549.
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 78a et seq.
    \104\ Supra note 5.
    \105\ Item 901(b)(1) defines the term partnership to mean any: 
(i) Finite-life limited partnership or (ii) other finite-life 
entity. 17 CFR 229.901(b)(1). The Commission has the authority under 
Section 36 of the Exchange Act to conditionally or unconditionally 
exempts any security or class of securities from the provisions of 
the Exchange Act to the extent that such exemption is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors. 15 U.S.C. 78mm(a)(1).
    \106\ Securities Exchange Act Release No. 49809 (June 4, 2004), 
69 FR 32784 (June 10, 2004), [File No. S7-24-04].
---------------------------------------------------------------------------

A. Reasons for the Proposed Action

    As described more fully in Section I, recently issuers whose 
securities are registered under Section 12, and therefore trading in 
the public markets, have restricted or attempted to restrict securities 
issued by them so as to limit or prohibit transfer to or from 
securities intermediaries, and in particular a securities 
depository.\107\ In doing so, these issuers have precluded investors 
from being able to hold securities in street name through a securities 
intermediary and in turn preclude investors from availing themselves of 
the decreased risk and costs associated with automated settlement and 
book-entry transfers available through a securities depository. This 
consequence of issuer restrictions is not compatible with the 
congressional objective that trades in the securities of publicly 
traded companies should be settled through the national system for 
clearance and settlement and benefit from its efficiencies and risk 
reductions and is a significant step backwards in our progress to 
develop the national system.
---------------------------------------------------------------------------

    \107\ Exchange Act Release Nos. 47365 (February 13, 2003), 68 FR 
8535 (February 21, 2003), [File No. SR-DTC-2003-02] (notice of 
proposed rule change); 47978 (June 4, 2003), 68 FR 35037 (June 11, 
2003), [File No. SR-DTC-2003-02] (order approving proposed rule 
change concerning requests for withdrawal of certificates by 
issuers).
---------------------------------------------------------------------------

B. Significant Issues Raised by Public Comment

    When the Commission proposed Rule 17Ad-20, it requested comment 
with respect to the proposal and the accompanying IRFA. We received no

[[Page 70861]]

comments on the IRFA, but received comments on the rule generally. 
Three commenters supported adoption of the rule proposed. Two of these 
commenters stated that precluding securities intermediaries from having 
securities registered in their own name will increase the use of 
securities certificates and thereby will increase the costs and risks 
associated with processing these certificates. They noted that the use 
of certificates adversely affects the clearance and settlement system 
and undermines the industry's long-term efforts to streamline 
securities processing and achieving straight-through processing in the 
U.S. The third commenter, DTC, noted that some issuers have refused to 
process or return shares presented by DTC for transfer or have 
significantly delayed transfers. DTC asserted that such actions by 
these issuers have resulted in the suspension of clearance and 
settlement services and thereby have delayed or prevented the 
settlement of trades and ultimately disrupted the national system for 
clearance and settlement.
    Five commenters opposed adoption of Rule 17Ad-20 or expressed 
reservations about the proposed rule until certain preconditions were 
met. One of these commenters contended that the rule would eliminate an 
important means by which issuers can protect themselves against the 
perceived negative effects of naked short selling. Several others 
believe the Commission should develop an effective program to prevent 
naked short selling before limiting the efforts of small companies to 
prevent naked short selling. One other stated that the rule raises 
state law concerns because the rights of a corporation and its 
securityholders are a matter of state law.
    Three commenters did not express their support for or opposition to 
adopting Rule 17Ad-20 but instead raised interpretive, operational, or 
timing issues with the proposal. One of these commenters stated its 
concern that Rule 17Ad-20 as proposed may unintentionally result in 
prohibiting certain restrictions on transfers that were never intended 
to be covered by the rule, such as escrow arrangements, collateral 
security arrangements, and the issuance of equity securities in private 
placements.

C. Small Entities Subject to the Rule

    Rule 17Ad-20 will affect registered transfer agents and issuers 
that are small entities. Pursuant to Rule 0-10 under the Exchange 
Act,\108\ a registered transfer agent is a small entity if it: (1) 
Received fewer than 500 items for transfer and fewer than 500 items for 
processing during the preceding six months (or in the time that it has 
been in business, if shorter); (2) transferred items only of issuers 
that would be deemed a ``small business'' or ``small organizations'' as 
defined in Rule 0-10 under the Exchange Act; (3) maintained master 
shareholder files that in the aggregate contained less than 1,000 
shareholder accounts or was the named transfer agent for less than 
1,000 shareholder accounts at all times during the preceding fiscal 
year (or in the time that it has been in business if shorter); or (4) 
is not affiliated with any person other than a natural person that is 
not a small business or small organization under Rule 0-10. We estimate 
that 470 transfer agents of approximately 900 registered transfer 
agents qualify as ``small entities'' for purposes of RFA and would be 
subject to the requirements of Rule 17Ad-20.
---------------------------------------------------------------------------

    \108\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    Rule 0-10 under the Exchange Act defines an issuer, other than an 
investment company, to be a small entity if it has total assets of $5 
million or less on the last day of its most recent fiscal year.\109\ We 
estimate that approximately 2500 issuers qualify as ``small entities'' 
for purposes of RFA and could be affected by the requirements of Rule 
17Ad-20. However, we believe that a significant number of these small 
issuers will not impose restrictions on their securities in a manner 
prohibited by Rule 17Ad-20 due to the impact of such restrictions on 
the liquidity of the securities and therefore will not be effected by 
the rule. To the extent that there is an impact on the minority of 
small issuers who choose to impose the type of restrictions effected by 
Rule 17Ad-20, we believe the benefits of this rule on the national 
system for clearance and settlement justify the costs imposed on them.
---------------------------------------------------------------------------

    \109\ Id.
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    While there are no reporting or recordkeeping obligations 
associated with Rule 17Ad-20, compliance by registered transfer agents 
will be subject to examination by the transfer agents' appropriate 
regulatory authority. Rule 17Ad-20 requires registered transfer agents 
to determine whether or not securities subject to the proposed rule 
could be eligible for transfer prior to effecting a transfer and 
whether the person or class of persons restricted from ownership by the 
issuer are securities intermediaries. Issuers and registered transfer 
agents might obtain certain representations or indemnifications from 
each other to remove any current restrictions that would be prohibited 
by the proposed rule and to assist registered transfer agents in 
complying with the rule, which might require one-time expenses related 
to contract revisions or legal fees.
    The Commission understands that some issuers might believe that the 
rule removes a mechanism by which they believe they can counter the 
negative effects of naked short selling in general, and manipulative 
naked short selling in particular.\110\ As has been previously 
contended in comment letters to the Commission, by requiring these 
securities to participate in the national system for clearance and 
settlement, it has been alleged that both issuers and investors will 
suffer losses due to the diminution in the market value of these 
securities caused by naked short selling or by adverse effects on 
ownership (e.g., market value and voting rights) stemming from such 
short sale transactions.\111\ The Commission believes that these issues 
are being addressed through oversight and regulation rather than 
issuers attempting to control the ownership or transfer of securities 
that trade in the public market. As stated in the release, we believe 
issuer-imposed restrictions on securities often make the stock less 
liquid, causing reduction in the trading volume of the securities. 
Under all of these circumstances, to the extent that there is any 
diminution of issuers' abilities to counter the perceived negative 
effects of naked short selling by restricting or prohibiting ownership 
or transfer by securities intermediaries, we believe the cost is 
justified by the benefits of the national system for clearance and 
settlement.\112\
---------------------------------------------------------------------------

    \110\ See Exchange Act Release No. 47978 (June 4, 2003), 68 FR 
35037 (June 11, 2003), [File No. SR-DTC-2003-02].
    \111\ Id.
    \112\ Most securities trading on a registered exchange or Nasdaq 
are already subject to SRO rules that require depository 
eligibility. Supra note 25 and 26. Accordingly, the proposed Rule 
17Ad-20 would affect only those issuers not trading on a registered 
exchange or Nasdaq.
---------------------------------------------------------------------------

E. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish the stated objective, while minimizing any 
significant adverse impact on small entities. In connection with Rule 
17Ad-20, the Commission considered the following alternatives: (a) The 
establishment of differing compliance or reporting requirements or 
timetables that take into

[[Page 70862]]

account the resources of small entities; (b) the clarification, 
consolidation or simplification of compliance and reporting 
requirements under the rule for small entities; (c) the use of 
performance rather than design standards; and (d) an exemption from 
coverage of the rule, or any part thereof, for small entities.
    Rule 17Ad-20 is designed to promote the integrity and efficiency of 
the U.S. clearance and settlement system by requiring as many publicly 
traded securities as practicable be eligible to clear and settle 
through the national system for clearance and settlement and allow 
investors and securities intermediaries retain the choice as to how to 
hold their securities in order to avail themselves of the benefits of 
the national system for clearance and settlement. The Commission 
believes that the establishment of different requirements for small 
entities is neither necessary nor practical because the proposal is 
designed to provide general standards that would protect the public and 
members of the financial community from increased inefficiencies, 
costs, and risks associated with trading, clearing, and settling 
securities without the protections afforded by the national system for 
clearance and settlement.
    By prohibiting registered transfer agents from transferring any 
equity security registered pursuant to Section 12 of the Act or any 
equity security that subjects an issuer to reporting under Section 
15(d) of the Act if such security is subject to any restriction or 
prohibition on transfer to or from a securities intermediary, Rule 
17Ad-20 uses performance standards rather than design standards to 
achieve its purpose. In addition, the Commission is unaware of ways to 
further clarify, consolidate or simplify the proposed amendment for 
small entities.

X. Statutory Authority?>

    The Commission is adding Sec.  240.17Ad-20 of Chapter II pursuant 
to Sections 3(b), 17A, 23(a), and 36 of the Exchange Act \113\ in the 
manner set forth below.
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 78q-1(a)(1), 78q-1(a)(2), 78q-1(d), and 78w(a).
---------------------------------------------------------------------------

List of Subjects in 17 CFR Part 240

    Securities, Securities intermediaries, Transfer agents.

Text of Final Rule

0
In accordance with the foregoing, Title 17, Chapter II of the Code of 
Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for Part 240 continues to read in 
part as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78q-1, 78s, 
78u-5, 78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *

0
2. Section 240.17Ad-20 is added to read as follows:


Sec.  240.17Ad-20  Issuer restrictions or prohibitions on ownership by 
securities intermediaries.

    (a) Except as provided in paragraph (c) of this section, no 
registered transfer agent shall transfer any equity security registered 
pursuant to section 12 or any equity security that subjects an issuer 
to reporting under section 15(d) of the Act (15 U.S.C. 78l or 15 U.S.C. 
78o(d)) if such security is subject to any restriction or prohibition 
on transfer to or from a securities intermediary in its capacity as 
such.
    (b) The term securities intermediary means a clearing agency 
registered under section 17A of the Act (15 U.S.C. 78q-1) or a person, 
including a bank, broker, or dealer, that in the ordinary course of its 
business maintains securities accounts for others in its capacity as 
such.
    (c) The provisions of this section shall not apply to any equity 
security issued by a partnership as defined in rule 901(b) of 
Regulation S-K (Sec.  229.901(b) of this chapter).

    Dated: November 30, 2004.

    By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-26785 Filed 12-6-04; 8:45 am]
BILLING CODE 8010-01-P