45894 Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices

6Securities Exchange Act Rel. No. 31512 (Nov.

24, 1991), 57 FR 57027 (Dec. 2, 1992).

7 17 CFR 200.30–3(a)(12).

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

2Securities Exchange Act Release No. 38820 (July

7, 1997), 62 FR 37947.

3The amendment was technical in nature and

therefore did not require republication of the notice.

4A copy of DTC’s procedures for repo accounts

is attached as Exhibit 2 to DTC’s proposed rule

change, which is available for inspection and

copying at the Commission’s Public Reference

Room or through DTC.

access to customer funds and securities,

and can direct the movement of such

assets by placing orders with clearing

firms.6 Customers are often unaware of

or unable to distinguish between

introducing and clearing firms, and tend

to rely heavily upon the representations

of brokers at introducing firms. A higher

net capital requirement will help ensure

the financial integrity of such

introducing firms and thereby help to

protect investors.

Similarly, better capitalized

introducing firms are less likely to

become insolvent. In the event that such

a firm does become insolvent, customers

will be better protected by higher

minimum net capital requirements. The

failure of an introducing firm can strand

an investor, who may be unable to place

orders directly with a clearing firm

because the clearing firm regards the

investor as the customer of the

introducing firm. Such a customer

would be unable either to liquidate or

open new positions until the

introducing firm is wound up or the

customer opens a new account with a

different broker. Higher net capital

levels would likely result in a quicker,

easier sale of the introducing firm and

would help to minimize the impact of

such a failure on the investing public.

Finally, the Exchange believes that

raising the minimum net capital level

for members will further the antifraud

provisions of the federal securities laws.

Members have access to customer

securities and funds either directly, as

in the case of a clearing firm, or

indirectly, as in the case of an

introducing firm that places orders with

a clearing firm on behalf of its

customers. In either case, member firms

are presented with an opportunity to

convert customer assets for personal or

other inappropriate use. Higher net

capital levels will help ensure adequate

firm resources to address such

problems. In addition, higher net capital

levels may create a disincentive toward

such activity by ensuring sufficient

operating capital. That is, a firm with

sufficient net capital may be less likely

to attempt to convert customer funds for

the firm’s use.

(2) Basis. The proposed rule change is

consistent with Section 6(b) of the Act

in general, and furthers the objectives of

Section 6(b)(5) in particular in that it is

designed to promote just and equitable

principles of trade and to remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest. Specifically, the

proposed rule change will help ensure

greater financial stability of the

Exchange’s members by requiring those

members to maintain higher capital

levels. In the event of adverse market

movements, these capital reserves will

help protect members and their

customers by helping to ensure that

funds are available to cover securities

positions.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CSE does not believe that the

proposed rule change will impose any

inappropriate burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

No comments were solicited in

connection with the proposed rule

change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) By order approve such proposed

rule change; or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filings will also be available for

inspection and copying at the principal

office of the CSE. All submissions

should refer to File No. SR–CSE–97–09

and should be submitted by September

19, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–23011 Filed 8–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38964; File No. SR–DTC–

97–05]

Self-Regulatory Organizations; The

Depository Trust Company; Order

Approving a Proposed Rule Change

Relating to the Establishment of

Procedures to Distinguish Repurchase

Transactions and Other Financing

Transactions From Securities Pledges

August 22, 1997.

On May 14, 1997, The Depository

Trust Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) a proposed rule change

(File No. SR–DTC–97–05) 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 July 15, 1997.2 The

Commission received no comment

letters in response to the filing. On

August 7, 1997, DTC amended the

proposed rule change.3 For the reasons

discussed below, the Commission is

approving the proposed rule change.

I. Description

The rule change amends DTC’s

Collateral Loan Program (‘‘CLP’’)

procedures 4 to enable DTC’s

participants to distinguish repurchase

transactions (‘‘repos’’) and other types of

financing transactions from pledges of

securities. The CLP’s current procedures

do not differentiate between a securities

transaction that involves the transfer of

the entire interest in securities (i.e., as

in a repo transaction) from a securities

transaction that involves the transfer of
Federal Register / Vol. 62, No. 168 / Friday, August 29, 1997 / Notices 45895

5According to DTC, many of its participants use

the CLP to effect repos.

6The instructions for a delivery of securities to

a repo account use the same data fields as the

instructions for a pledge to a pledgee account,

which includes a mandatory hypothecation code

field. A participant delivering securities to a repo

account must enter the number seven, eight, or nine

in the hypothecation code field. The entry of the

number seven, eight, or nine in the hypothecation

code field of instructions for a delivery to a repo

account does not constitute a notice or

representation as to any matter by the delivering

participant. The entry of the number seven, eight,

or nine in the hypothecation code field of such

instructions is merely an action needed to effect the

delivery through DTC’s facilities. A participant

pledging securities to a pledgee account must

continue to enter the number one, two, or three,

whichever is applicable, in the hypotecation code

field. Participants are responsible for entering the

appropriate number in the hypothecation field for

all transactions. Letter from Carl Urist, Deputy

General Counsel, DTC (August 7, 1997).

7According to DTC’s proposed procedures for

repo accounts, the operation of a repo account will

be identical to the operation of a pledgee account.

As with a pledgee account: (1) the voting rights on

securities credited to a repo account will be

assigned to the participant that delivered the

securities to the repo account; (2) cash dividend

and interest payments and other cash distributions

on the securities will be credited to the account of

the delivering participant; (3) distributions of

securities for which the exdistribution date is on or

prior to the payable date or in which the

distribution is payable in a different security will

be credited to the account of the delivering

participant; and (4) any stock splits or other

distributions of the same securities for which the

ex-distribution date is after the payable date will be

credited to the repo account of the receiver. Also,

the reports and statements that DTC sends to

participants and receivers for transactions involving

repo accounts will be the same as the reports that

DTC generates for a pledgee account except that

such reports and statements will carry a repo

account number.

8According to DTC, there are a small number of

non-member banks that maintain pledge accounts at

DTC. Conversation with Carl H. Urist, Deputy

General Counsel, DTC (August 22, 1997).

9The indemnification provides protection from

liability that may arise in the event that, unknown

to DTC, at the time of the transfer there was a filing

by the Securities Investor Protection Corporation or

other court order that prohibited such transfer. Id.

10 15 U.S.C. 78q–1(b)(3)(F).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

3Letter from Robert E. Aber, Vice President and

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Commission (March 27, 1997)

(‘‘Amendment No. 1’’). Amendment No. 1 makes

technical and conforming changes to the proposed

rule filing.

4Letter from Robert E. Aber, Vice President and

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Commission (April 1, 1997)

(‘‘Amendment No. 2’’). Amendment No. 2 makes

technical and conforming changes to the proposed

rule filing.

5Letter from Robert E. Aber, Vice President and

General Counsel, Nasdaq, to Katherine England,

Assistant Director, Commission (June 17, 1997)

(‘‘Amendment No. 3’’). Amendment No. 3 makes

technical and conforming changes to the proposed

rule filing, correcting clerical errors and defining

terms used in the rule language. For example,

Amendment No. 3 defines two abbreviations used

in the rules, as well as the terms ‘‘Market Value’’

and ‘‘Country of Domicile.’’

6Exchange Act Release No. 38469 (April 2, 1997).

7 62 FR 17262 (April 9, 1997).

a security interest or other limited

interest in the securities (i.e., a pledge).5

Under the proposed rule change, any

organization that is eligible to establish

a pledgee account (i.e., ‘‘receiver’’) at

DTC may establish a repo account.

Consequently, a participant engaging in

a repo or other type of financing

transaction will be able to deliver

securities to the receiver’s repo account

instead of the receiver’s pledgee

account.6 DTC will deem instructions to

deliver securities to a repo account as

instructing DTC to transfer to the

receiver the entire interest in the

securities and not just a security interest

or other limited interest.7

DTC will accept instructions solely

from a receiver with respect to the

disposition of securities credited to the

receiver’s repo account. The receiver

may instruct DTC to deliver securities

credited to its repo account to its DTC

participant account if the receiver is

also a DTC participant or to any other

DTC participant account.8 Any receiver

that instructs DTC to deliver securities

credited to its repo account to another

receiver or to a DTC participant other

than the original delivering participant

will be required to provide DTC with

certain warranties and must indemnify

DTC, its stockholders, and certain

employees against potential liability.9

II. Discussion

Section 17A(b)(3)(F) 10 of the Act

requires that the rules of a clearing

agency be designed to safeguard

securities and funds in DTC’s custody or

control or for which it is responsible.

The Commission believes that DTC’s

proposed rule change is consistent with

DTC’s obligations under the Act because

the new procedures should enable DTC

participants to avoid any confusion as to

whether a securities transfer is actually

the sale of a security or the pledge of a

security as collateral. Consequently, the

procedures should reduce the potential

for the inadvertent delivery of dividend

payments, proxy materials, or other

items to the wrong party.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with the requirements of the

Act and in particular with the

requirements of Section 17A of the Act

and the rules and regulations

thereunder.

It Is Therefore Ordered, pursuant to

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

proposed rule change (File No. SR–

DTC–97–05) be, and hereby is,

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–23005 Filed 8–28–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–38961; File No. SR–NASD–

97–16]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change and Notice of

Filing and Order Granting Accelerated

Approval of Amendment No. 3 Relating

to the Revision of the Criteria for Initial

and Continued Listing on The Nasdaq

Stock Market, Inc.

August 22, 1997.

I. Introduction

On March 3, 1997, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly owned subsidiary The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’), filed

with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’)1 and Rule

19b–4 thereunder 2 to revise its listing

and maintenance standards for Nasdaq

National Market (‘‘NNM’’) and

SmallCap designated issuers. On March

27, 1997, the NASD filed Amendment

No. 1 to the proposal.3 On April 1, 1997,

the NASD filed Amendment No. 2 to the

proposal.4 On June 17, 1997, the NASD

filed Amendment No. 3 to the

proposal.5

Notice of the substance of the

proposed rule change and Amendment

Nos. 1 and 2 was provided by issuance

of a release 6 and by publication in the

Federal Register.7 Eight comment letters

regarding the proposed rule change