70852 Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 

1The 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.

3Section 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.

5Pursuant 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).

6Securities Exchange Act Release No. 49809 

(June 4, 2004), 69 FR 32784 (June 10, 2004), [File 

No. S7–24–04].

7Letters 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’’).

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 transactionby-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.

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 bookentry movements.

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.

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.

Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 70853

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).

11See S. Rep. No. 75, 94th Cong., 1st Sess. at 122 

(1975).

12The 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).

13The 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 bookkeeping entry without physical issuance of 

securities certificates. 15 U.S.C. 78c(a)(25).

14Section 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).

15See, 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).

17For 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.)

20See Exchange Act Release No. 49405 (March 

11, 2004), 69 FR 12922 (March 18, 2004), [File No. 

S7–13–04] (securities transaction settlement 

concept release).

21The 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 

Continued

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

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 timeconsuming.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., straightthrough-processing) and shorter 

settlement cycles.20

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

70854 Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 

participants (i.e., broker-dealers and banks) are 

beneficial owners, as are the participants’

customers. However, DTC, the clearing brokerdealer (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 bookentry 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].

23Fungible 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.

24Exchange 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).

25Exchange 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 bookentry settlement of all transactions in depositoryeligible 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.

26Exchange 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).

27Securities 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.

28Of 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.

30See, 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.

32Securities 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.

33While DTC is the registered owner, the 

participants and their customers are the beneficial 

owners. See supra note 21.

34A 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.

35For 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.

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.

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 selfregulatory 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

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.

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

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, brokerdealers 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 brokerdealers would still have to be manually 

processed. Thus, clearing and settling 

securities transactions outside of a 

depository causes greater risks and 

Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 70855

36Supra note 5.

37See, 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.

40For 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.

41See 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.

43See, 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).

44See 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.

45Only issuers whose securities are trading on the 

NYSE are prohibited from charging transfer or 

certification fees.

46Securities Exchange Act Release No. 49809 

(June 4, 2004), 69 FR 32784 (June 10, 2004), [File 

No. S7–24–04].

47Supra note 13. Issuers acting as their own 

transfer agent would be subject to Rule 17Ad–20.

48Supra note 5.

inefficiencies, including credit risk 

issues and risk of defaults, than clearing 

and settling securities transactions 

within a depository.

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.

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 brokerdealers to deliver certificates on each 

transaction and eliminates the ability of 

naked short sellers to maintain a naked 

short sale position.42

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 brokerdealers and banks were forced 

individually to negotiate a solution 

directly with the issuer.

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

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. Brokerdealers 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.

III. The Proposed Rule 

On June 4, 2004, the Commission 

proposed Rule 17Ad–2046 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 

70856 Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 

49Supra 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.

51Supra note 7.

52Letters from the SIA, Legg Mason, and DTC.

53Letter from DTC (July 8, 2004).

54Letter from DTC (August 19, 2004).

55NSCC 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.

56Letter from H. Glenn Bagwell.

57NSCC’s Stock Borrow Program was approved 

by the Commission. Securities Exchange Act 

Release No. 17422 (December 29, 1980), 46 FR 3104 

(January 13, 1981).

58Letters from David Patch, Glenda King, 

Frederick D. Lipman, X–Clearing Corporation, and 

H. Glenn Bagwell.

59Letter from David Patch.

60Letter from Glenda King.

61Letter from X–Clearing Corporation.

62 Id.

63Letters from David Patch, H. Glenn Bagwell, 

and Frederick D. Lipman.

64Letters 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.

65Letter from X–Clearing Corporation.

66Letters from Pacific Corporate Trust Company, 

Registrar and Transfer Company, and Cleary, 

Gottlieb, Steen & Hamilton.

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

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 straightthrough processing in the U.S.

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.

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.

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

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

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 bookentry form.65

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 

Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 70857

67Letters 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].

68Letter from Registrar and Transfer Company.

69Letter from Cleary, Gottlieb, Steen & Hamilton.

70Supra 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.

71The term ‘‘transfer’’ means (1) delivery of the 

security (i.e., the certificate, or in the case of bookentry, 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.

73The 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.’’

74When 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.

75State 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).

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.

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.

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.

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 brokerdealers to discontinue buying or selling 

these issuers’ securities on behalf of 

their customers.

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-bytransaction 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 brokerdealer to register the securities in her 

name and issue a certificate.

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 

70858 Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 

76Securities 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.

78Letters from Pacific Corporate Trust Company 

and Registrar and Transfer Company.

79The 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].

80Letter from X–Clearing Corporation.

81 Id.

82 15 U.S.C. 78c(a)(23).

83 15 U.S.C. 78q–1(b)(1).

84Letter from Registrar and Transfer Company.

85 15 U.S.C. 78c(a)(25).

86 15 U.S.C. 78q–1(c)(1). 87 44 U.S.C. 3501 et seq.

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.

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

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.

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.

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’’).

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 

Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 70859

88Every 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.

89Letter 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.

92Nazareth 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.

93See 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).

94Telephone 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.

95Letter 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].

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

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 bookentry 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 nontransferable 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.

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 

70860 Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 

96 Id.

97Exchange Act Release No. 50103 (July 28, 

2004), 69 FR 48008 (August 6, 2004), [File No. S7–

23–03].

98As 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.

99 15 U.S.C. 78c.

100Pub. L. 104–290, 110 Stat. 3416 (1996).

101See supra notes 25 and 26.

102As 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.

103 15 U.S.C. 78a et seq.

104Supra 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).

106Securities Exchange Act Release No. 49809 

(June 4, 2004), 69 FR 32784 (June 10, 2004), [File 

No. S7–24–04].

107Exchange 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).

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

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 anticompetitive 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.

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.

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.

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 bookentry 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.

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 

Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 70861

108 17 CFR 240.0–10(a). 109 Id.

110See Exchange Act Release No. 47978 (June 4, 

2003), 68 FR 35037 (June 11, 2003), [File No. SR–

DTC–2003–02].

111 Id.

112Most 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.

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 straightthrough 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.

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.

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

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 

70862 Federal Register / Vol. 69, No. 234 / Tuesday, December 7, 2004 / Rules and Regulations 

113 15 U.S.C. 78q–1(a)(1), 78q–1(a)(2), 78q–1(d), 

and 78w(a).

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 

§ 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.

List of Subjects in 17 CFR Part 240

Securities, Securities intermediaries, 

Transfer agents.

Text of Final Rule

■ 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

■ 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.

* * * * *

■ 2. Section 240.17Ad–20 is added to 

read as follows:

§ 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 (§ 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