13544 Federal Register / Vol. 72, No. 55 / Thursday, March 22, 2007 / Notices 

1 15 U.S.C. 78s(b)(1). 

2Securities Exchange Act Release No. 54832 

(November 29, 2006), 71 FR 71000 (December 7, 

2006) [File No. SR–BSE–2006–46]. 

3Concurrent with this order, the Commission is 

approving similar rule changes submitted by the 

Philadelphia Stock Exchange, Inc., and Chicago 

Stock Exchange, Inc. Securities Exchange Act 

Release Nos. 54834 (November 29, 2006), 71 FR 

71013 (December 7, 2006) [File No. SR–Phlx–2006–

69] and 54833 (November 29, 2006), 71 FR 71004 

(December 7, 2006)[File No. SR–CHX–2006–33]. 

The Commission has also granted approval to 

similar rule changes submitted by the New York 

Stock Exchange LLC (‘‘NYSE’’), American Stock 

Exchange LLC (‘‘Amex’’), The NASDAQ Stock 

Market LLC (‘‘Nasdaq’’), and the NYSE Arca, Inc. 

(‘‘NYSE Arca’’). Securities Exchange Act Release 

Nos. 54289 (August 8, 2006), 71 FR 47278 (August 

16, 2006) [File No. SR–NYSE–2006–29]; 54290 

(August 8, 2006), 71 FR 47262 (August 16, 2006) 

[File No. SR–Amex–2006–40]; 54288 (August 8, 

2006), 71 FR 47276 (August 16, 2006) [File No. SR–

NASDAQ–2006–08]; 54410 (September 7, 2006), 71 

FR 54316 (September 14, 2006) [File No. SR–NYSE 

Arca–2006–31]. 

4Currently, the only registered clearing agency 

operating a DRS is DTC. For a detailed description 

of DRS and the DRS facilities administered by DTC, 

see Securities Exchange Act Release Nos. 37931 

(November 7, 1996), 61 FR 58600 (November 15, 

1996), [File No. SR–DTC–96–15] (order granting 

approval to establish DRS) and 41862 (September 

10, 1999), 64 FR 51162 (September 21, 1999), [File 

No. SR–DTC–99–16] (order approving 

implementation of the Profile Modification System). 

5 In that regard, in March 2004 the Commission 

published a concept release that discussed, among 

other things, whether more should be done to 

reduce the use of physical securities certificates by 

individual investors. The Commission noted that 

the use of physical certificates increases the costs 

and risks of clearing and settling securities 

transactions, costs that most often are ultimately 

borne by investors. Securities Exchange Act Release 

No. 8398 (March 11, 2004), 69 FR 12922 (March 18, 

2004). Issuers may save money by not having to 

print or process physical certificates but may incur 

other ongoing expenses to maintain book-entry 

records, such as mailing statements to shareholders. 

6The exact text of the BSE’s proposed rule change 

is set forth in its filing, which can be found at 

http://www.bostonstock.com/legal/ 

pending_rule_filings.html. 

7 DTC’s rules require that a transfer agent 

(including an issuer acting as its own transfer agent) 

acting for a company issuing securities in DRS must 

be a DRS Limited Participant. Securities Exchange 

Act Release No. 37931 (November 7, 1996), 61 FR 

58600 (November 15, 1996), [File No. SR–DTC–96–

15]. 

8 15 U.S.C. 78f(b)(5). 

9Securities Exchange Act Release No. 49405 

(March 11, 2004), 69 FR 12922 (March 18, 2004), 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55480; File No. SR–BSE–

2006–46] 

Self-Regulatory Organizations; Boston 

Stock Exchange, Inc.; Order Granting 

Approval of a Proposed Rule Change 

Amending Rules To Require Securities 

Become Eligible for a Direct 

Registration System 

March 15, 2007. 

I. Introduction 

On October 26, 2006, the Boston 

Stock Exchange, Inc. (‘‘BSE’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’) proposed 

rule change SR–BSE–2006–46 pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’).1 Notice 

of the proposal was published in the 

Federal Register on December 7, 2006.2

No comment letters were received. For 

the reasons discussed below, the 

Commission is granting approval of the 

proposed rule change.3

II. Description 

The Direct Registration System 

(‘‘DRS’’) allows an investor to establish 

either through the issuer’s transfer agent 

or through the investor’s broker-dealer a 

book-entry position on the books of the 

issuer and to electronically transfer her 

position between the transfer agent and 

the broker-dealer of her choice through 

a facility currently administered by The 

Depository Trust Company (‘‘DTC’’).4

DRS, therefore, enables an investor to 

have securities registered in her name 

on the books of the issuer without 

having a securities certificate issued to 

her and to electronically transfer her 

securities to her broker-dealer in order 

to effect a transaction without the risk, 

expenses, and delays associated with 

the use of securities certificates. 

Investors holding their securities in 

DRS retain the rights associated with 

securities certificates, including such 

rights as control of ownership and 

voting rights, without having the 

responsibility of holding and 

safeguarding securities certificates. In 

addition, in corporate actions such as 

reverse stock splits and mergers, 

cancellation of old shares and issuance 

of new shares are handled electronically 

with no securities certificates to be 

returned to or received from the transfer 

agent. 

BSE believes that DRS will be an 

important step in reducing the use of 

securities certificates, which should 

facilitate transfers in securities and 

could eventually lead to lower risks and 

costs for issuers and investors.5 To 

encourage the use of DRS, the BSE will 

require that all listed securities be 

eligible to participate in DRS. As 

approved, BSE would add Section 3 to 

Chapter XXVII that will require any 

security initially listing on BSE on or 

after January 1, 2007, to be eligible for 

a DRS that is operated by a clearing 

agency registered under Section 17A of 

the Act. This requirement, however, 

would not extend to (i) securities of 

companies which already have 

securities listed on BSE, (ii) securities of 

companies which immediately prior to 

such listing had securities listed on 

another securities exchange in the U.S., 

or (iii) non-equity securities which are 

book-entry only. Under the rule, on and 

after January 1, 2008, all securities listed 

on BSE, other than non-equity securities 

which are book-entry only, must be 

eligible for a DRS that is operated by a 

clearing agency registered under Section 

17A of the Act.6 While this rule change 

would require that securities be DRS 

eligible, it would not mandate the 

elimination of securities certificates 

and, subject to applicable state law and 

the company’s governing documents, an 

investor could still elect to receive a 

securities certificate if an issuer elects to 

issue securities certificates. 

In order for a security to be eligible for 

the only DRS in operation today, the 

issuer is required to use a transfer agent 

that meets certain insurance and 

connectivity requirements.7 As a result, 

some transfer agents may have to make 

changes to comply with their 

requirements. In addition, certain 

issuers may have to make amendments 

to their governing documents, such as 

their by-laws or corporate charters, to be 

eligible to issue book-entry positions. To 

allow sufficient time for these changes, 

BSE proposed implementing the 

proposed requirement on January 1, 

2008, for issuers with securities already 

listed on BSE or another listed 

marketplace when the rule is approved. 

Companies listing for the first time 

would have greater flexibility to adopt 

any required changes and therefore the 

proposed requirement would be 

applicable to new listings beginning 

January 1, 2007. 

III. Discussion 

Section 6(b)(5) of the Act requires, 

among other things, that the rules of an 

exchange be designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, to foster cooperation 

and coordination with persons engaged 

in regulating, clearing, settling, 

processing information with respect to, 

and facilitating transactions in 

securities, to remove impediments to 

perfect the mechanism of a free and 

open market and a national market 

system, and in general to protect 

investors and the public interest.8 For 

the reasons described below, the 

Commission finds that BSE’s rule 

change is consistent with Section 6(b)(5) 

of the Act. 

The use of securities certificates has 

long been identified as an inefficient 

and risk-laden mechanism by which to 

hold and transfer ownership.9 Because 


rwilkins on PROD1PC63 with NOTICES
Federal Register / Vol. 72, No. 55 / Thursday, March 22, 2007 / Notices 13545 

[File No. S7–13–04] (Securities Transaction 

Settlement Concept Release). 

10 Id. 

11 15 U.S.C. 78q–1(a)(2)(A). Congress expressly 

envisioned the Commission’s authority to extend to 

all aspects of the securities handling process of 

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). 

12Securities Exchange Act Release No. 32455 

(June 11, 1993), 58 FR 33679 (June 18, 1993) (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). 

13Securities 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 

exchange). 

14 In 1996, the NYSE modified its listing criteria 

to permit listed companies to issue securities in 

book-entry form provided that the issue is included 

in DRS. Securities Exchange Act Release No. 37937 

(November 8, 1996), 61 FR 58728 (November 18, 

1996), [File No. SR–NYSE–96–29]. Similarly, the 

NASD modified its rule to require that if an issuer 

establishes a direct registration program, it must 

participate in an electronic link with a securities 

depository in order to facilitate the electronic 

transfer of the issue. Securities Exchange Act 

Release No. 39369 (November 26, 1997), 62 FR 

64034 (December 3, 1997), [File No. SR–97–51]. On 

July 30, 2002, the Commission approved a rule 

change proposed by the NYSE to amend NYSE 

Section 501.01 of the NYSE Listed Company 

Manual to allow a listed company to issue 

securities in a dematerialized or completely 

immobilized form and therefore not send stock 

certificates to record holders provided the 

company’s stock is issued pursuant to a dividend 

reinvestment program or a stock purchase plan or 

is included in a DRS. Securities Exchange Act 

Release No. 46282 (July 30, 2002), 67 FR 50972 

(August 6, 2002), [File No. SR–NYSE–2001–33]. 

15 In approving the proposed rule change, the 

Commission considered the proposal’s impact on 

the efficiency, competition, and capital formation. 

15 U.S.C. 78c(f). 

16 17 CFR 200.30–3(a)(12). 

securities certificates require manual 

processing, their use can result in 

significant delays and expenses in 

processing securities transactions and 

presents the risk of certificates being 

lost or stolen. Many of these costs and 

risks are ultimately borne by 

investors.10 Congress has recognized the 

problems and dangers that the use of 

certificates presents to the safe and 

efficient operation of the U.S. clearance 

and settlement system and has given the 

Commission the responsibility and the 

authority to address these issues.11

Consistent with its Congressional 

directives and in its efforts to improve 

efficiencies and decrease risks 

associated with processing securities 

transactions, the Commission has long 

advocated a reduction in the use of 

certificates in the trading environment 

by immobilization or dematerialization 

of securities and has encouraged the use 

of alternatives to holding securities in 

certificated form. Among other things, 

the Commission 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 12 and that require any 

security listed for trading must be 

depository eligible if possible.13 More 

recently the Commission has approved 

the implementation and expansion of 

DRS.14

While the U.S. markets have made 

great progress in immobilization and 

dematerialization for institutional and 

broker-to-broker transactions, many 

industry representatives believe that the 

small percentage of securities held in 

certificated form (held mostly by retail 

investors) impose unnecessary risk and 

disproportionately large expense to the 

industry and to investors. In an attempt 

to help address this issue, BSE’s rule 

change, along with those of the NYSE, 

Amex, Nasdaq, NYSE Arca, Phlx, and 

CHX, should help expand the use of 

DRS. As a result, risks, costs, and 

processing inefficiencies associated 

with the use of securities certificates 

should be reduced, and impediments to 

the perfection of the national market 

system should be removed. 

Additionally, those investors holding 

securities in listed securities certificates 

covered by the rule change that decide 

to hold their securities in DRS should 

realize the benefits of more accurate, 

quicker, and more cost-efficient 

transfers; faster distribution of sale 

proceeds; reduced number of lost or 

stolen certificates and a reduction in the 

associated certificate replacement costs; 

and consistency of owning in bookentry across asset classes. 

The Commission realizes that some 

issuers and transfer agents may bear 

expenses related to complying with the 

rule change. In order to make an issue 

DRS-eligible, issuers of listed companies 

must have a transfer agent which is a 

DRS Limited Participants and may need 

to amend their corporate governing 

documents to permit the issuance of 

book-entry shares. The Commission 

believes, however, that the long-term 

benefits of increased efficiencies and 

reduced costs and risks afforded by DRS 

outweigh the costs that some issuers 

and transfer agents may incur. 

Furthermore, the time frames built into 

the proposal should allow issuers and 

their transfer agents sufficient time to 

make any necessary changes to comply 

with the rule change. 

While the rule change should 

significantly reduce the number of 

transactions in securities for which 

settlement is effected by the physical 

delivery of securities certificates, it will 

not eliminate the ability of investors to 

obtain securities certificates provided 

the issuer has chosen to issue 

certificates. Such investors can continue 

to contact the issuer’s transfer agent, 

either directly or through their brokerdealer, to obtain a securities certificate. 

Accordingly, for the reasons stated 

above the Commission finds that the 

rule change is consistent with BSE’s 

obligation under Section 6(b) of the Act 

to foster cooperation and coordination 

with persons engaged in regulating, 

clearing, settling, processing 

information with respect to, and 

facilitating transactions in securities, to 

remove impediments to perfect the 

mechanism of a free and open market 

and a national market system, and in 

general to protect investors and the 

public interest.15

V. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change is consistent with the 

requirements of the Act and in 

particular with the requirements of 

Section 6(b)(5) of the Act and the rules 

and regulations thereunder. It is 

therefore ordered, pursuant to Section 

19(b)(2) of the Act, that the proposed 

rule change (File No. SR–BSE–2006–46) 

be and hereby is approved. 

For the Commission by the Division of 

Market Regulation, pursuant to delegated 

authority.16

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–5190 Filed 3–21–07; 8:45 am] 

BILLING CODE 8010–01–P 


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