[Federal Register Volume 62, Number 182 (Friday, September 19, 1997)]
[Notices]
[Pages 49277-49278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24858]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39070; File No. SR-DTC-97-10]


Self-Regulatory Organizations; the Depository Trust Company; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to the Certificate of Deposit Early Redemption Service

September 12, 1997.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 3, 1997, the 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which items have been prepared 
primarily by DTC. The Commission is publishing this notice to solicit 
comments from interested persons on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change will modify DTC's existing Certificate of 
Deposit Early Redemption Service (``CERR'') to allow participants to 
transmit certificate of deposit (``CD'') early redemption instructions 
by electronic delivery rather than by delivery of hardcopy forms (i.e., 
paper).

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\2\
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    \2\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Currently, DTC participants redeeming CDs prior to maturity must 
process such transactions through DTC's Voluntary Offering Program. 
These participants submit early redemption instructions to DTC by way 
of a hardcopy Voluntary Offering Instruction Form (``VOI Form'') which 
must be accompanied by any additional required documentation.\3\ Upon 
receipt of early redemption instructions, DTC debits the participant's 
general free account and enters a corresponding credit in the same 
account using a contra-CUSIP number. When DTC receives the proceeds of 
an early redemption from the issuer, DTC credits the principal amount 
and any accrued interest minus any applicable penalty for early 
redemption to the participant's settlement account.
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    \3\ When a CD is redeemed prior to maturity, the beneficial 
owner of the CD is charged an early withdrawal fee unless the 
beneficial owner is deceased or has been adjudicated incompetent (or 
for any other reason listed in the applicable trust agreement or 
bond indenture). If the early withdrawal request is based on one of 
those circumstances, the early withdrawal fee is waived, and the 
early redemption is considered ``exempt.'' Some issuers require 
owners seeking an exempt early redemption to submit documentation 
substantiating the exemption. Such documentation presently is 
submitted to DTC by participants with the VOI form.
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    DTC proposes to modify CERR by offering participants the ability to 
transmit early redemption instructions to DTC electronically through 
DTC's Participant Terminal System (``PTS''). DTC will modify its 
already existing PTS function, the Reorganization Inquiry for 
Participants System (``RIPS''), to offer information regarding early 
redemption \4\ such as: (i) a CD's eligibility for processing through 
CERR; (ii) the last date prior to maturity on which an issuer will 
accept a CD for early redemption; and (iii) whether or not an issuer 
requires the immediate submission of documents supporting an exempt 
early redemption. In addition, DTC will add a CERR function to PTS 
through which participants will be able to transmit early redemption 
instructions electronically to DTC.
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    \4\ DTC has advised the Commission that the RIPS procedures 
currently contain the following provision which will also be 
applicable to CD early redemption information on RIPS:
    The information provided by means of the RIPS function is based 
upon communications (whether oral or written) received by DTC from a 
variety of sources, and DTC does not represent that such information 
is accurate, or adequate or fit for any particular purpose. DTC 
shall not be liable for (1) any loss resulting directly or 
indirectly from mistakes, omissions, interruptions, delays, errors 
or defects arising from or related to the information provided on 
the RIPS function, and (2) any special, consequential, exemplary, 
incidental, or punitive damages. The information provided in the 
RIPS function with respect to a particular reorganization activity 
is subject to change at any time without prior notice.
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    In order to submit an early redemption instruction to DTC 
electronically, a participant will input information into CERR, 
including (i) the quantity of the eligible securities to be

[[Page 49278]]

redeemed, (ii) customer information, (iii) information required by the 
issuer, (iv) whether the early redemption is exempt or nonexempt, and 
(v) if exempt, details regarding the circumstances supporting the 
exemption.\5\ Next, the participant will transmit the early redemption 
instructions after which CERR will report any editing errors to the 
participant and will determine whether the participant's general free 
account contains a position sufficient to cover the instruction.\6\ 
After the submitted information is verified, the participant will be 
required to transmit the information to DTC again. By transmitting the 
instruction the second time, the participant will be acknowledging that 
the information inputted is correct and that the participant agrees to 
maintain and submit, if requested within thirty months from the date of 
redemption, documentation supporting an exempt early redemption. If an 
issuer requires that documentation be submitted prior to early 
redemption, the participant must also acknowledge that it will provide 
such documentation to DTC within five business days from the date of 
the instruction.
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    \5\ Under the existing system, participants must submit any 
documentation required to support as exempt early redemption in 
hardcopy along with the early redemption instruction. However, under 
the CERR PTS function the participant requesting early redemption 
will not be required to submit such documentation in hardcopy at the 
time of the early redemption instruction but must agree to supply 
such information to DTC if requested by the issuer within thirty 
months of the early redemption. If a participant fails to provide 
such documentation to DTC when requested to do so within such 
thirty-month period, DTC will charge the participant the amount of 
the nonexempt early redemption fee and will remit the proceeds to 
the issuer.
    \6\ If the participant does not have a position sufficient to 
support the instruction, the instruction will be dropped because 
instructions submitted through the CERR PTS function are not subject 
to DTC's recycle procedures. Accordingly, participants will be 
required to monitor their general free account and enter a new 
instruction once a position sufficient to satisfy the instruction is 
available.
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    Upon receipt of an electronic early redemption instruction, DTC 
will deduct the securities from the participant's general free account 
and add the securities to the participant's reorganization account. If 
the issuer requires the participant to submit documentation supporting 
an exempt early redemption, the instruction will spend until the fifth 
business day from the date of the instruction.\7\ Participants may 
determine the status of an early redemption instruction by using an 
inquiry function on CERR PTS.
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    \7\ If DTC has not received the required supporting documents by 
the end of the fifth business day, the instruction will be dropped.
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    When DTC receives the proceeds of a CD early redemption, DTC will 
promptly credit the funds to the participant's settlement account and 
debit the participant's reorganization account. If the issuer rejects 
the presentment, DTC will endeavor to determine the reason for the 
rejection, convey this information to the participant, and restore the 
position to the participant's general free account.
    All early redemption instructions, whether exempt or not, will be 
subject to acceptance by the issuer. Therefore, it is possible that a 
presentment could be rejected by the issuer because the CD does not 
provide for early redemption. If DTC is able to identify such CDs 
itself, the RIPS function will indicate that the CD does not have an 
early redemption privilege and will automatically prevent a participant 
from entering early redemption instructions for such CDs.
    DTC does not believe that it is feasible to determine whether all 
of the 20,000 CDs currently eligible for services at DTC provide for 
early redemption. Therefore, a participant's early redemption 
instruction ultimately may be rejected by the issuer even if it 
initially is accepted for processing by CERR. When such a rejection 
occurs, DTC will convey the reason for the rejection to the participant 
and will restore the position to the participant's general free 
account.
    DTC believes that the proposed rule change is consistent with the 
requirements of section 17A(b)(3)(A) of the Act \8\ and the rules and 
regulations thereunder because it promotes efficiencies in the 
clearance and settlement of securities transactions.
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    \8\ 15 U.S.C. 78q-1(b)(3)(A).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    DTC has not solicited or received any comments.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \9\ and Rule 19b-4(e)(4) thereunder \10\ because 
it effects a change in an existing service of DTC that (i) does not 
adversely affect the safeguarding of securities or funds in the custody 
or control of DTC or for which it is responsible and (ii) does not 
significantly affect the respective rights or obligations of DTC or 
persons using the service. At any time within sixty days of the filing 
of such rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(e).
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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, NW., Washington, DC 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, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of DTC. All submissions 
should refer to File No. SR-DTC-97-10 and should be submitted by 
October 10, 1997.
    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24858 Filed 9-18-97; 8:45 am]
BILLING CODE 8010-01-M