[Federal Register Volume 65, Number 195 (Friday, October 6, 2000)]
[Proposed Rules]
[Pages 59766-59773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25773]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-43401; File No. S7-18-00]
RIN 3235-AH94


Processing Requirements for Cancelled Security Certificates

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Commission is publishing for comment proposed rules to 
improve the processing of securities certificates by transfer agents. 
Proposed Rule 17Ad-19 under the Securities Exchange Act of 1934 would 
require every transfer agent to establish and implement written 
procedures for the cancellation, storage, transportation, and 
destruction of securities certificates. The rule would also require 
transfer agents to: Mark each cancelled securities certificate with the 
word ``cancelled''; maintain a secure storage area for cancelled 
certificates; have specific procedures for the destruction of cancelled 
certificates, and maintain an electronic database of all of its 
cancelled certificates. Additionally, the Commission proposes to codify 
that Rules 17f-1 (the lost and stolen securities rule) and 17Ad-12 (the 
transfer agent safekeeping rule) apply to cancelled certificates.

DATES: Comments should be received on or before December 5, 2000.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. Comment letters should refer to File 
No. S7-18-00. All comment letters received will be made available for 
public inspection and copying in the Commission's Public Reference 
Room, 450 Fifth Street, NW., Washington, DC 20549-0102. Comments also 
may be submitted electronically at the following E-mail address: 
<a href="/cdn-cgi/l/email-protection#a1d3d4cdc4fec2ceccccc4cfd5d2e1d2c4c28fc6ced7"><span class="__cf_email__" data-cfemail="7c0e091019231f1311111912080f3c0f191f521b130a">[email protected]</span></a>. All comment letters should refer to File Number 
S7-18-00, this file number should be included on the subject line if E-
mail is used. Comment letters will be available for inspection and 
copying in the public reference room at the same address. 
Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director, or Thomas C. Etter, Jr., Special Counsel, at (202) 942-4187, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION

I. Introduction

    In this release, we propose rules to require transfer agents to 
establish written procedures for the cancellation, storage, 
transportation, and destruction of securities certificates. 
Additionally, we propose to require the tracking of securities in 
transit between reporting institutions; to set a time frame for making 
inquiries about possible lost, stolen, missing, or counterfeit 
securities certificates; and to define related terms in the transfer 
agent rules. The amendments would clarify that cancelled certificates 
fall within the Commission's Lost and Stolen Securities Program and 
that they must be safeguarded.\1\
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    \1\ In a separate release, we have proposed to allow registered 
transfer agents to use electronic media and microfiche for 
recordkeeping purposes. By providing more flexibility for the 
storage of cancelled certificates, transfer agents could destroy 
certificates at the time they are cancelled thereby reducing costs 
and the potential for theft and misuse. Securities Exchange Act 
Release No. 41442 (May 25, 1999), 64 FR 29608.

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[[Page 59767]]

    These proposals promote several fundamental Commission goals: (1) 
Improving the safety and efficiency of securities processing and 
transfer; (2) reducing the physical movement of securities 
certificates; and (3) reducing the potential for fraudulent use of 
cancelled securities certificates. The proposals primarily relate to 
problems and costs associated with cancelled securities certificates. 
In particular, we address the problem that, until properly destroyed, 
cancelled securities certificates can resurface in the market place and 
can be used to defraud members of the public or financial institutions. 
Better procedures for processing and destroying cancelled certificates 
would reduce this potential for harm.

II. Background

    When a security certificate is retired, such as when a bond is 
redeemed or ownership of stock is transferred, it is cancelled by the 
transfer agent. Cancellation normally involves both an accounting entry 
on the books of the transfer agent and an alteration of the certificate 
itself. Any registered cancelled certificate must then be stored for 
not less than six years under the record retention rules \2\ of the 
Securities Exchange Act of 1934 (``Exchange Act'').\3\ Thereafter, the 
certificate may be destroyed.\4\ In recent years, many corporate bond 
issues have been called for redemption decades before their 
maturities.\5\ These bond redemptions and an active stock market have 
generated vast amounts of cancelled securities certificates that must 
be shipped, stored, safeguarded, and tracked.
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    \2\ 17 CFR 240.17Ad-6(c) and 240.17Ad-7(d). The term 
``registered '' as used in 17 CFR 240.17Ad.6(c) with reference to 
cancelled certificates means certificates registered in the name of 
an owner, as distinct from bearer certificates which were in wide 
circulation when this rule was promulgated in 1997.
    \3\ 48 Stat. 881 (1934), 15 U.S.C. 78a et seq.
    \4\ It has been suggested that the Commission mandate the 
destruction of cancelled certificates within thirty days of their 
cancellation. While current practices are changing and some transfer 
agents may select alternative means to satisfy the recordkeeping 
requirements for cancelled certificates (see supra note 5), many 
transfer agents satisfy these recordkeeping requirements by 
maintaining the physical certificates themselves. In this regard, 
issuers and transfer agents are often called upon by courts and 
investors to produce records that validate transfer instructions, 
transfer authorizations, and for other evidence best available from 
cancelled certificates or acceptable images or copies thereof. 
Accordingly, we do not believe that a uniform destruction 
requirement is necessary or appropriate at this time. Commenters are 
invited to address this issue.
    \5\ Among the reasons for these bond redemptions has been the 
decline in long-term interest rates since the early 1980s.
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    Certificate processing can involve significant warehousing costs 
and risks. The following examples illustrate some of these risks.
    In a 1992 case, approximately $111 billion face amount of cancelled 
bond certificates disappeared after being delivered from a transfer 
agent's warehouse to a certificate destruction vendor. The 
certificates, representing many well-known public companies, later 
began to resurface worldwide. A number of banks and brokers as well as 
individuals were defrauded through sales of the cancelled certificates 
for cash or through use of the cancelled certificates as loan 
collateral. The bulk of these cancelled certificates still remain 
unaccounted for and continue to resurface in the marketplace.\6\
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    \6\ In 1992, the commission brought an action against a transfer 
agent for its failure to report stolen certificates pursuant to Rule 
17f-1, 17 CFR 240.17f-1, and for its failure to safeguard securities 
in its possession pursuant to Rule 17Ad-12, 17 CFR 240.17Ad-12. The 
transfer agent agreed to pay a civil penalty of $750,000 and to 
cease and desist from future violations of sections 17(f)(1) and 17A 
of the Exchange Act and Rules 17f-1 and 17Ad-12 thereunder. See SEC 
v. Citibank, N.A., Civil Action No. 92-2833 (USDC, DC, 1992). 
Securities Exchange Act Release No. 31612 (December 17, 1992), 53 
SEC Docket 224.
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    In a similar 1994 case, approximately $6 billion face amount of 
cancelled bond certificates disappeared after being delivered from a 
transfer agent's record center to two certificate destruction vendors. 
The cancelled certificates, which represented well-known companies, 
later began to circulate worldwide. Again, the bulk of these cancelled 
certificates remain unaccounted for and continue to resurface in the 
marketplace.\7\
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    \7\ In 1994, the Commission and the Comptroller of the Currency 
brought a joint action against a transfer agent for its failure to 
report stolen cancelled certificates pursuant to Rule 17f-1 and its 
failure to safeguard securities in its possession pursuant to Rule 
17Ad-12. The transfer agent agreed to pay a civil penalty of 
$100,000 and to cease and desist from future violation of sections 
17(f)(1) and 17A of the Exchange Act and Rules 17f-1 and 17Ad-12 
thereunder. As remedial measures, the transfer agent also agreed to 
make cancelled certificates with the word ``cancelled'' and to adopt 
other safeguards. See The Chase Manhattan Bank, Administrative 
Proceeding No. 3-8518. Securities Exchange Act Release No. 34784 
(October 4, 1994), 57 SEC Docket 2195.
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    In another instance, cancelled certificates were stolen from a 
transfer agent's shipping bags while in transit. The transfer agent 
regularly shipped cancelled certificates from the West Coast to a New 
York bank for processing. The transfer agent, however, did not record 
the contents of its shipments and, in effect, relied on its processing 
agent to do its bookkeeping. When the shipping bags were stolen, 
neither the transfer agent nor its processing agent realized that the 
certificates were missing. A number of the certificates resurfaced more 
than a month after the theft in off-market sales.\8\
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    \8\ In 1994, the Commission and the Office of the Comptroller of 
the Currency brought a joint enforcement action against a transfer 
agent and found that the transfer agent had violated section 
17(f)(1) of the Exchange Act and Rule 17f-1 thereunder for failing 
to report the missing securities to the Commission's Lost and Stolen 
Securities Program. The transfer agent agreed to cease and desist 
from any further violations of section 17(f)(1) and Rule 17f-1 
thereunder and agreed to pay a $75,000 civil penalty. See Seattle-
First National Bank, Securities Exchange Act Release No. 34293 (July 
1, 1994), 57 SEC Docket 146.
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    Other instances have involved bulk thefts of cancelled certificates 
from warehouses. In some cases, the records of the certificate numbers 
also were stolen because they were stored with the certificates. Even 
in cases where certificate records for stolen securities were 
available, they generally were of limited value in identifying the 
stolen securities because the records were manual, rather than 
electronic, and they were organized chronologically by cancellation 
dates rather than by certificate numbers. As a result, the necessary 
information was not easily retrievable from the records.
    In many cases, the stolen certificates reentered the marketplace 
either through sales or as collateral for loans, resulting in 
substantial fraud on public investors, public companies, creditors, 
broker-dealers, and transfer agents. Not only do situations such as 
these present potential liability for the transfer agents responsible, 
but they consume the resources of regulatory and criminal law 
enforcement agencies.
    A common transfer agent practice contributed to this problem. In 
physically cancelling certificates, many transfer agents marked the 
certificates only with pin-hole sized perforations. These tiny 
perforations were used to avoid defacing the certificates and impairing 
their usefulness as records. The pinholes, however, which usually 
formed the cancellation date and the initials of the transfer agent, 
often were barely noticeable. In some cases, they have been mistaken 
for notary or authentication markings. Even more problematic was the 
practice by some transfer agents of not marking certificates at all to 
indicate that the certificates had been cancelled.
    Although neither the text nor the legislative history of Sections 
17(f) and

[[Page 59768]]

17A of the Exchange Act \9\ expressly discusses cancelled certificates, 
these provisions provide the Commission with ample authority and 
responsibility to protect investors and securities industry 
participants from the dangers associated with the fraudulent use of 
cancelled certificates. Section 17(f)(1),\10\ in fact, is designed to 
curtail the profitability of and the unlawful trafficking in lost and 
stolen securities certificates.\11\ Moreover, section 17A, among other 
things, requires adequate safeguarding of funds and securities within a 
transfer agent's custody or control or for which it is responsible.\12\ 
The Commission has broad discretion in carrying out this mandate.\13\
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    \9\ 48 Stat. 881 (1934), 15 U.S.C. 78q(f) and 78q-1.
    \10\ 15 U.S.C. 78q(f)(1).
    \11\ See Lost and Stolen Securities Program, Hearings before the 
Permanent Subcommittee on Investigations of the Senate Committee on 
Government Operations, 93d Cong., 1st Ses. (1973), 2d Sess. (1974). 
S.249, which became the Securities Acts Amendments of 1975, was 
amended on the floor of the Senate to add legislation concerning 
lost, stolen, missing, and counterfeit securities. 121 Cong. Rec. 
6186 (April 17, 1975). See also Conference Report to Accompany 
S.249, 94th Cong., 1st Sess. 103-104 (1975).
    \12\ See Securities Acts Amendments of 1975, Comm. on Banking, 
Housing and Urban Affairs, Sen. Rep. No. 75 to Accompany S. 249, 56-
58 (1975).
    \13\ ``The Commission is empowered with broad rulemaking 
authority over all aspects of a transfer agent's activities as a 
transfer agent.'' Id. at 56-57. For example, cancelled securities 
certificates already are expressly covered by the Exchange Act's 
recordkeeping rules that apply to transfer agents. Rule 17Ad-6(c), 
17 CFR 240.17Ad-6(c).
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    We believe that most situations where cancelled securities 
certificates resurfaced in the market place have resulted from a lack 
of good internal control systems for the processing, storage, 
transportation, or destruction of the certificates. The rules that we 
propose today are intended to provide for more efficient and secure 
certificate processing, particularly of cancelled certificates. 
Moreover, the proposed amendments would promote several fundamental 
Commission mandates: (1) Improving the safety and efficiency of 
securities transfers; (2) reducing the physical movement of securities 
certificates; and (3) reducing the potential for fraudulent use of 
cancelled securities certificates.\14\
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    \14\ See, generally, Exchange Act, section 17A(a), (e), and (f).
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III. Proposed Rules

A. Proposed Rule 17Ad-19: Processing of Cancelled Certificates

    The processing of cancelled certificates is largely governed by 
trade practices. For example, in 1994, the Securities Transfer 
Association (``STA''), the largest transfer agent trade association, 
adopted guidelines for its members which, among other things, call for 
marking cancelled certificates with the word ``cancelled'' and for 
greater security measures in certificate storage and destruction.\15\ 
Because cancellation is the critical first step in the processing of 
retired securities certificates, we believe that rulemaking is 
necessary to strengthen and standardize this process.\16\
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    \15\ Rules of the STA, Section 1.26 (Recommended Procedures for 
Cancelled Securities).
    \16\ STA has over 400 members, the majority of whom are 
registered transfer agents. For STA's website, see www.stai.org. 
There is no self-regulatory organization for transfer agents.
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    Proposed Rule 17Ad-19 \17\ would require each transfer agent to: 
(1) Have a written statement setting forth its procedures for the 
cancellation, storage, transportation, and destruction of securities 
certificates; (2) clearly apply to the face of each cancelled 
certificate the word ``cancelled'' unless the transfer agent's 
procedures will cause the certificate to be destroyed in accordance 
with other Commission rules within 72 hours of its cancellation; (3) 
transport cancelled certificates in a secure manner with a record of 
the certificates in transit; (4) witness and document the destruction 
of certificates; and (5) keep a retrievable electronic record of each 
cancelled certificate with identifying data.\18\ The rule would 
authorize the Commission to provide exemptions from these provisions in 
appropriate cases upon written request or upon its own motion, such as 
where a transfer agent lacks any automated capability or where a 
transfer agent uses electronic storage media to image certificates and 
then immediately destroys the certificates pursuant to Exchange Act 
rules.\19\ Under Rule 17Ad-7(i), as amended, transfer agents would have 
to maintain records to demonstrate compliance with these requirements 
of Rule 17Ad-19 for not less than three years, the first year in an 
easily accessible place.\20\
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    \17\ 17 CFR 240.17Ad-19.
    \18\ Required certificate detail would be: CUSIP number, 
certificate number including prefix or suffix, denomination, 
registration, issue date, and cancellation date. Cf., Exchange Act 
Rules 17Ad-9(a) and 17f-1(c)(6), 17 CFR 240.17Ad-9(a) and 240.17f-
1(c)(6).
    \19\ See Securities Exchange Act Rule 0-12, 17 CFR 240.0-12 
regarding existing exemption provisions.
    \20\ This recordkeeping requirement for Rule 17Ad-19 would have 
no effect on the recordkeeping requirements of Rule 17Ad-6(c) which 
applies to certificates themselves.
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    We believe that if the word ``cancelled'' were clearly imprinted 
onto or perforated into each cancelled certificate, it would help 
protect the public and industry participants from certain forms of 
securities fraud. Therefore, we have included such a requirement in the 
proposed rule. We welcome comments on whether we should prescribe 
standards for this requirement, such as the size of the word 
``cancelled'' and where it should be placed on a certificate.

B. Rule 17f-1: Lost and Stolen Securities Program

1. Background
    Section 17(f)(1) of the Exchange Act requires the Commission to 
operate a Lost and Stolen Securities Program (``LSSP'' or ``Program''). 
Congress directed the establishment of the Program in 1975 to curtail 
trafficking in lost, stolen, missing, and counterfeit securities 
certificates.
    Rule 17f-1 under the Exchange Act governs LSSP. The Program 
consists mainly of a data base for securities that are reported lost, 
stolen, missing, or counterfeit. Operationally, the Program has two 
essential parts: ``reports'' and ``inquiries.'' Most financial 
institutions (including banks, brokers, and transfer agents) are 
required to participate in the Program and must ``report'' any 
certificates that they discover to be lost, stolen, missing, or 
counterfeit.\21\ Financial institutions also must ``inquire'' about any 
securities certificate valued at $10,000 or more that comes into their 
possession or keeping.\22\ Additionally, these financial institutions 
may, on a permissive basis, report or inquire about other 
certificates.\23\ The Program was designed with the belief that 
economic realities would cause financial institutions to inquire in a 
timely manner in connection with any securities certificates in 
substantial amounts that came into their possession.\24\
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    \21\ Rule 17f-1(c) and (d), 17 CFR 240.17f-1(c) and (d).
    \22\ See Rule 17f-1(d)(iv), 17 CFR 240.17f-1(d)(iv). The inquiry 
requirement applies to any securities certificate received as part 
of a transaction whose aggregate value (face value in the case of 
debt or market value in the case of stocks) exceeds $10,000. 
Required inquiries under existing Rule 17f-1(d) would not be changed 
by this rule proposal.
    \23\ E.g., inquiries on securities certificates valued at less 
than $10,000. See Paragraph (e) of Exchange Act Rule 17f-1, 17 CFR 
240.17f-1(e).
    \24\ See ``Inquiry Requirements,'' Securities Exchange Act 
Release No. 13832 (August 5, 1977), 42 FR 41022.
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    The Program is operated under contract with the Commission by the 
Securities Information Center, located in Boston, Massachusetts. As of 
December 31, 1999, the Program's data base contained reported 
securities with a value of approximately $385 billion. Subscribing 
institutions participating in

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the Program totalled 25,569, consisting of 13,982 banks, 10,664 
securities organizations,\25\ and 923 non-bank transfer agents. During 
1999, reports were made on 1,438,305 certificates (an average of 5,708 
certificates per business day); inquiries were made on 7,993,148 
certificates (an average of 31,719 certificates per business day); and 
matches or ``hits'' resulting from inquiries were made on 301,420 
certificates, which had a value of approximately $6.9 billion.\26\ The 
hits essentially warned the inquirers that reports had been filed with 
the Program against the certificates inquired about. This meant that 
the certificates had been reported as lost, stolen, missing, or 
counterfeit, and that they were not eligible for transfer.
2. Rule 17f-1 Definitions
    a. ``Securities Certificate''. We propose to amend Rule 17f-1(a) to 
add a definition of ``securities certificate'' to clarify that the 
scope of Rule 17f-1 covers a certificate from the time it is printed by 
the issuer or the issuer's agents until the time it is destroyed. 
Accordingly, it would cover: certificates that have been printed but 
never issued, certificates that have been issued and remain 
outstanding, certificates that are held by the issuer as treasury 
securities or held by the issuer or its agents in any other capacity, 
and certificates that have been cancelled.
    b. ``Missing'' Securities Certificates. The term ``missing'' is 
used in section 17(f)(1) of the Exchange Act and in Rule 17f-1 
thereunder, but it is not defined.\27\ The term missing has been used 
to describe certificates that cannot be located, such as certificates 
that are not found during a count or audit, but that are thought to be 
misfiled rather than lost or stolen.\28\
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    \27\ While parallel terms (lost, stolen, and counterfeit) also 
are not defined by the statute or the rule, we believe that their 
meanings are clear from the context.
    \28\ See, e.g., Rule 17f-1(c)(2)(ii) concerning certificates 
considered ``missing'' as the result of a securities count or 
verification during, for example, an internal audit.
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    There are other circumstances, however, where a transfer agent 
believes it knows what happened to a cancelled certificate but cannot 
be certain. For example, if cancelled certificates are stored by a 
transfer agent in a warehouse that is destroyed by a fire, the transfer 
agent may believe but cannot necessarily be confident (i.e., to the 
point of providing a guarantee) that all of the stored certificates 
were destroyed.\29\ In such a situation, a risk exists that some of the 
certificates will resurface in the marketplace. These certificates 
might be described as lost but also could be described as missing.
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    \29\ On March 19, 1997, a major warehouse fire apparently 
destroyed a large number of cancelled securities certificates held 
in storage by a transfer agent, and the fire reportedly was caused 
by arson. See ``A Burning Question: How Safe Are Your Records,'' 
Business Week, June 23, 1997, at page 130E4.
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    The Commission believes it would be in the public interest to 
define the term ``missing'' for purposes of Rule 17f-1 to mean: (1) Any 
certificate that cannot be located but which is not believed to be lost 
or stolen; and (2) any certificate that the transfer agent believes was 
destroyed, but was not destroyed according to the certificate 
destruction procedures required by proposed Rule 17Ad-19(c). Transfer 
agents would be required to report these types of missing certificates 
to LSSP. Then, if the certificates resurfaced, there would be a high 
degree of likelihood that they would be identified through LSSP.
3. Rule 17f-1: LSSP Reporting
    Rule 17f-1 governs the operations of LSSP, including that Program's 
data base for securities certificates that are lost, stolen, missing, 
or counterfeit. The Commission has brought enforcement actions for 
violations of Rules 17f-1 where cancelled securities certificates that 
were lost or stolen were not reported to LSSP.\30\ Nevertheless, there 
appears to be uncertainty about whether this rule applies to cancelled 
certificates.\31\
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    \30\ See, e.g, SEC v. Citibank, N.A., supra note 9.
    \31\ For example, one court has found that because ``cancelled 
securities'' are not expressly included in Rule 17f-1, they are not 
subject to the reporting requirements of that rule. A.G. Edwards & 
Sons, Inc. v. Centocor, Inc., Civil Action No. 91-6133 (E.D. PA, 
1992).
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    In our view, cancelled certificates come within the meaning and 
purpose of Rules 17f-1. Like counterfeit certificates, cancelled 
certificates have no intrinsic value, but they can be used to defraud 
the public.\32\ Therefore, in the interest of safety and soundness in 
certificate processing, we propose to amend Rule 17f-1 by adding to the 
rule subparagraph (a)(6) which would define ``securities certificates'' 
as expressly including cancelled certificates.
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    \32\ In United States v. Jackson, 576 F.2d. 749, 757 (8th Cir. 
1978), the court recognized that stolen blank stock certificates 
have no intrinsic value as investments but that they have a 
``thieves' market value'' as demonstrated by an FBI undercover 
operation, which was part of the case, where the certificates were 
purchased at 40% of their apparent market value.
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4. Rule 17f-1(d)(3): LSSP Inquiries
    In Rule 17f-1, paragraph (c) governs ``reports'' about lost, 
stolen, missing, and counterfeit securities, and paragraph (d) governs 
``inquiries'' about lost, stolen, missing, and counterfeit securities. 
While the rule currently specifies time frames for making reports, it 
specifies no time frames for making inquiries. Proposed Rule 17f-
1(d)(3) would address time frames for inquiries under LSSP.\33\
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    \33\ For description of ``inquiries,'' see supra notes 23-28 and 
accompanying text.
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    In 1976, when the rule was adopted, the absence of a time frame for 
making inquiries was meant to accommodate various business practices 
and to avoid commercial disruptions.\34\ However, since the 1970s 
business conditions have changed substantially, in large part due to 
improvements in automation and communications. Inquiries by financial 
institutions to LSSP have become quite routine and systematic; a 
standard for inquiries can no longer be viewed as potentially 
disruptive to commerce. Second, we note that the lack of any time limit 
for making required inquiries has made compliance with the rule 
difficult to monitor.\35\ Accordingly, we propose to add paragraph 
(d)(3) to Rule 17f-1 providing that inquiries must be made by the end 
of the fifth business day after a certificate comes into the possession 
or keeping of a reporting institution, provided that such inquiries 
shall be made before the certificate is

[[Page 59770]]

sold, used as collateral, or sent to another reporting institution.
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    \34\ When enacting the underlying statute, Congress stated that 
the Commission should carefully weigh the benefits of mandating 
inquiries against the costs and effects on efficient business 
practices. Conference Report on S. 249, Securities Acts Amendments 
of 1975, 94th Cong., 1st Sess. 104 (1975). In 1976, the Commission 
observed that the system for inquiries should avoid undue 
disruptions to commercial transactions and chose not to set time 
limits for inquiries. See Securities Exchange Act Release No. 12030 
(January 20, 1976), 41 FR 04834. In 1979, when the Commission asked 
for comments from the industry, reporting institutions said they 
favored a policy of leaving to their own business judgment the time 
frames for valuing and inquiring of LSSP about securities that came 
into their possession. The Commission accepted that position. See 
``inquiry Time Frames,'' Securities Exchange Act Release No. 15683 
(March 29, 1979), 44 FR 20614
    \35\ The Seventh Circuit Court of Appeals observed that the 
addition of a precise time frame for making required inquiries would 
improve the operation of the rule. First National Bank of Cicero v. 
Lewco Securities Corp., 860 F.2d 1407, 1416, n. 14 (7th Cir. 1988). 
The court also said that whether an institution meets the test of 
``good faith'' required for bona fide purchaser status with respect 
to securities certificates may depend on whether it has met the 
inquiry requirements of Rule 17f-1. Id. at 1413-1415. See also 
Yadley and Ilkson, ``Bona Fide Purchasers of Lost and Stolen 
Securities: Meeting the `Good Faith;' and `Notice' Requirements,'' 5 
George Mason U.L. Rev. 101, 127-133 (1982).
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5. Rule 17f-1(c)(2): Securities Shipments
    We are proposing to add to Rule 17f-1(c)(2)(i) language that would 
require transfer agents to track shipments of securities certificates, 
including cancelled certificates, between reporting institutions.\36\ 
When such a shipment becomes unaccounted for (for example, where the 
delivering institution fails to receive notice of its receipt), the 
delivering institution would be required to timely investigate and take 
reasonable steps to determine the facts. If the certificates cannot be 
located, the delivering institution must report to LSSP that the 
certificates are missing, stolen, or lost and must do so within a 
reasonable time not exceeding ten business days after the shipment was 
sent.
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    \36\ The term ``reporting institution'' would have the meaning 
set forth in 17 CFR 240.17f-1(a)(1).
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C. Rule 17Ad-12: Safeguarding of Funds and Securities

    Rule 17Ad-12 governs the safekeeping of funds and securities by 
transfer agents. It requires that securities be handled in a manner 
that is reasonably free from the risk of destruction, theft, or other 
loss. The proposed amendment to Rule 17Ad-12 is intended to generally 
improve safety and soundness in certificate processing and, 
specifically, to clarify that cancelled certificates come within the 
meaning and purpose of Rule 17Ad-12. As we observed earlier, a 
cancelled certificate has no intrinsic value, but like a counterfeit 
certificate, it can be used to defraud the public. Moreover, we have 
brought enforcement actions for violations of Rule 17Ad-12 that 
involved cancelled securities certificates.\37\ Therefore, we propose 
to amend Rule 17Ad-12 to state that it applies to ``securities 
certificates,'' a term that we have proposed to define to include 
cancelled certificates.\38\
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    \37\ See, e.g., SEC v. Citibank, N.A., supra at note 9.
    \38\ See, supra, Section III.B.2.a. for discussion of definition 
of securities certificate.
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IV. Request for Public Comment

    Any person wishing to submit comments on the above proposals or 
related matters is invited to do so. We specifically solicit comments 
on whether the proposed procedures for the cancellation, storage, and 
destruction of securities certificates would help prevent the theft and 
fraudulent resale or collateralization of cancelled securities. If the 
proposed rules do not appear to do so, commenters are requested to 
suggest other provisions that would ensure the safekeeping of cancelled 
securities and avoid the risks that cancelled certificates currently 
pose to the marketplace.
    We also are requesting cost data for implementation of the 
proposals requiring procedures for the cancellation, storage, 
transportation, and destruction of securities certificates. We are 
soliciting comments on the proposed time frame for inquiries under Rule 
17f-1 and about any undue burdens to commerce that might result from 
the proposed rules.
    We welcome comments on whether proposed Rule 17Ad-19 should apply 
to all of approximately 1,050 registered transfer agents or only to the 
approximately 825 registered transfer agents that maintain security 
holder records for one or more securities issues. The difference of 
approximately 225 includes ``named transfer agents,'' which refer their 
transfer agent business to transfer agent service companies,\39\ and 
includes other transfer agents that conduct a specialty business or are 
inactive.
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    \39\ See Rule 17Ad-9(j) and (k), 17 CFR 240.17Ad-9(j) and (k).
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    Members of the securities industry have advised the Commission 
about a practice of using hand stamps on securities certificates that 
state ``cancelled in error'' or similar language to avoid the expense 
of destroying certificates that are marked ``cancelled'' by mistake. 
They have recommended that the Commission prohibit this practice and 
require that certificates that are mistakenly marked ``cancelled'' be 
destroyed. Do you believe we should adopt such a rule? We welcome any 
comments on this matter.
    We welcome comments on how much ``certificate data'' should be 
retained and indexed for cancelled certificates, destroyed 
certificates, and certificates that are in transit.\40\ Finally, for 
purposes of the Small Business Regulatory Enforcement Fairness Act of 
1996, the Commission is also requesting information regarding the 
potential impact of the proposed rule on the economy on an annual 
basis. Commentators should provide empirical data to support their 
views.
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    \40\ For the term ``certificate data,'' see supra note 20.
---------------------------------------------------------------------------

V. Costs and Benefits of Proposed Amendments

    The Commission is considering the costs and benefits of proposed 
Rule 17Ad-19 and the proposed amendments to Rules 17f-1 and 17Ad-12. 
The Commission has identified certain costs and benefits relating to 
the proposals, which are discussed below, and we encourage commenters 
to discuss any additional costs or benefits. In particular, we request 
comment on the potential costs for any necessary modifications to 
information gathering, management, and record-keeping systems or 
procedures, as well as any potential benefits resulting from the 
proposals for issuers, transfer agents, banks, brokers, regulators, or 
others. Commenters should provide analysis and data to support their 
views on the cost and benefits associated with the proposals.

A. Benefits

    The proposals should provide specific benefits to U.S. investors, 
issuers, transfer agents, and other financial intermediaries. These 
benefits are not readily quantifiable in terms of dollar value. 
Nevertheless, the proposals are designed to reduce the fraudulent use 
of securities certificates, particularly cancelled certificates, by 
requiring improved safeguarding and recordkeeping by transfer agents. 
In recent years, the fraudulent resale and fraudulent collateralization 
of cancelled certificates (certificates with no investment value) have 
cost private individuals and financial institutions many millions of 
dollars. Such costs could be substantially reduced or even eliminated 
by adequate safeguarding and recordkeeping of these certificates by 
transfer agents. Moreover, the proposals should provide the added 
benefit of increasing compliance with securities certificate 
recordkeeping and safeguarding rules (by, among other things, 
clarifying that cancelled certificates are subject to these rules), 
while decreasing instances of fraud on investors.
    The Commission does not have data to quantify the value of the 
benefits described above. We are seeking comment on how we may quantify 
these benefits and any other benefits, not already identified, that may 
result from the adoption of the proposed amendments.

B. Costs

    The proposals require transfer agents to have written procedures 
for the cancellation, storage, transportation, and destruction of 
securities certificates; to mark cancelled securities certificates as 
``cancelled''; to witness and document the destruction of certificates; 
and to keep a retrievable electronic record of each cancelled 
certificate. The preparation of these written procedures

[[Page 59771]]

requested by the new rules would be a cost to transfer agents.
    Regarding the proposed use of the word ``cancelled'' on cancelled 
certificates, we understand that, with the encouragement of the 
Securities Transfer Association's published guidelines,\41\ most 
transfer agents already are marking their cancelled certificates with 
the word ``cancelled'' to designate their cancelled status.\42\ We 
believe that the proposed requirement to use the word ``cancelled'' 
would to a large extent codify good business practices with little 
additional cost to the industry.
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    \41\ See supra, note 18.
    \42\ We believe that most transfer agents are properly marking 
their retired certificates with the word ``cancelled,'' as STA has 
recommended. However, because doing so is not a Commission 
requirement, it is not a part of the Commission's examination module 
for transfer agents. Thus, our data on the subject is anecdotal, 
rather than systematic.
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    The proposed requirements to witness and record the destruction of 
certificates and to keep retrievable electronic records of the 
cancelled certificate would mean additional costs to many transfer 
agents. However, existing Exchange Act rules already require transfer 
agents to maintain ``appropriate certificate detail,'' and this 
includes records of cancelled certificates,\43\ and these requirements 
would apply only on a going forward basis, i.e., transfer agents will 
not have to create electronic records for old cancelled certificates. 
Moreover, the proposed recordkeeping requirements, to a substantial 
degree, would clarify requirements and encode recordkeeping practices 
already in place, and we are unable to quantify the extent of such 
incremental costs. We would welcome the submission of detailed 
information on the subject.
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    \43\ See Securities Exchange Act Rules 17Ad-6(c) and 17Ad-9(a); 
17 CFR 17Ad-6(c) and 17Ad-9(a).
---------------------------------------------------------------------------

VI. Effects on Competition, Efficiency, and Capital Formation

    In adopting rules under the Exchange Act, section 23(a)(2) requires 
the Commission to consider the impact any rule would have on 
competition. Further, the law requires that the Commission not adopt 
any rule that would impose a burden on competition not necessary or 
appropriate in furtherance of the Exchange Act. Section 3(f) of the 
Exchange Act requires the Commission, when engaged in rulemaking, and 
when considering the public interest, to consider whether the action 
would promote efficiency, competition, and capital formation.
    The proposed amendments should improve market efficiency by 
reducing a source of fraud and its associated costs and inefficiencies 
(i.e., the fraudulent introduction of cancelled and worthless 
securities into the marketplace). In addition, the proposed amendments 
should have no material anticompetitive effects because they would 
apply equally to all transfer agents and should have no material effect 
on capital formation.
    To evaluate more fully the effects on competition of the proposed 
amendments, we are requesting commenters to provide their views and 
specific empirical data as to any effects their adoption would have on 
competition. We also request comments on what effect the proposals, if 
adopted, would have on efficiency and capital formation.

VII. Summary of Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA''), in accordance with the provisions of the 
Regulatory Flexibility Act,\44\ regarding proposed Rule 17Ad-19 and the 
amendments to Rules 17f-1 and 17Ad-12 under the Exchange Act. The IRFA 
states that the purpose of the proposal is to establish uniform 
procedures for the cancellation, storage, and destruction of securities 
certificates.
---------------------------------------------------------------------------

    \44\ 5 U.S.C. 603.
---------------------------------------------------------------------------

    The IRFA sets forth the statutory authority for the proposal. The 
IRFA also discusses the effect of the proposal on transfer agents that 
are small entities pursuant to Rule 0-10 under the Exchange Act.\45\ A 
transfer agent is a small entity if it: (1) Received less than 500 
items for transfer and less than 500 items for processing during the 
preceding six months (or in the time that it has been in business, if 
shorter); (2) 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); and (3) is not affiliated with any person (other 
than a natural person) that is not a small business or small 
organization under Rule 0-10. Approximately 470 registered transfer 
agents qualify as ``small entities'' for purposes of the RFA and would 
be subject to the requirements of proposed Rule 17Ad-19.
---------------------------------------------------------------------------

    \45\ 17 CFR 240.0-10.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-19 would require all transfer agents to 
establish and implement written procedures for the cancellation, 
storage, transportation, and destruction of securities certificates. 
Such written procedures and the implementation thereof shall be subject 
to examination by the transfer agent's appropriate regulatory agency. 
Additionally, amendments to Rules 17f-1 and 17Ad-12 would clarify that 
these two rules apply broadly to securities certificates, including 
cancelled securities certificates.
    The IRFA states that the Commission considered whether viable 
alternatives to the proposed rulemaking exist that accomplish the 
stated objectives of applicable statutes that minimize any significant 
economic impact of proposed rules on small entities. More specifically, 
the Commission considered the following alternatives: (1) The 
establishment of different procedures that take into account the 
resources available to small entities; (2) the clarification, 
consolidation, or simplification of compliance and reporting 
requirements under the proposed rules insofar as they affect small 
entities; (3) the use of performance rather than design standards; and 
(4) an exemption from coverage of the rule, or any part thereof, for 
small entities.
    As explained further in the IRFA, the Commission has considered 
significant alternatives to the proposed rules that would adequately 
address the problem posed by cancelled securities certificates. 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 certain types of 
securities fraud, and the proposal would include an exemption procedure 
that would be available to small entities on a case by case basis. 
Moreover, the IRFA concludes that the Commission believes that the 
proposal, if adopted, would not adversely affect small entities. 
Finally, the IRFA addresses each of the other requirements set forth 
under 5 U.S.C. 603.
    The Commission encourages the submission of written comments with 
respect to any aspect of the IRFA. Those comments should specify costs 
of compliance with the proposed rule, and suggest alternatives that 
would accomplish the objective of proposed Rule 17Ad-19. A copy of the 
IRFA may be obtained by contacting Thomas C. Etter, Jr., Division of 
Market Regulation, Securities and Exchange Commission, 450 5th Street, 
NW., Washington, DC 20549-1001, telephone no. (202) 942-4895.

[[Page 59772]]

VIII. Paperwork Reduction Act

    Certain provisions of the proposed amendments contain ``collection 
of information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA''),\46\ and the Commission has submitted 
them to the Office of Management and Budget (``OMB'') for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title for the 
collection of information is: ``Record Retention Requirements for 
Registered Transfer Agents.'' The OMB control number for the current 
collection of information is 3235-0136. The collection requirements are 
necessary to ensure the integrity of transfer agents' records and the 
safeguarding of securities certificates.
---------------------------------------------------------------------------

    \46\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Proposed Rule 17Ad-19 contains collection of information 
requirements that are intended to ensure the integrity and completeness 
of transfer agents' records regarding physical securities certificates, 
in particular cancelled securities certificates. Rule 17Ad-19 would 
require each registered transfer agent to: (1) Have a written statement 
setting forth its procedures for the cancellation, storage, 
transportation, and destruction of securities certificates; (2) mark 
each cancelled certificate with the word ``cancelled'' on the face of 
the certificate; (3) witness and document the destruction of 
certificates; and (4) keep a retrievable electronic record of each 
cancelled certificate with identifying certificate data. The proposed 
amendments to Rules 17f-1 and 17Ad-12 would involve no additional 
paperwork requirements.
    Proposed Rule 17Ad-19 would incorporate the three year record 
retention requirement of Rule 17Ad-7(i), but the proposed amendments to 
Rules 17f-1 and 17Ad-12 would add not any retention periods for 
recordkeeping requirements. The maintenance of written procedures by 
transfer agents under Rule 17Ad-19 would be mandatory. The written 
procedures would be confidential and not available to the public, 
although they would be subject to examination by the Commission or 
other appropriate regulatory agencies. We note that an agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number.
    Approximately 1,100 transfer agents are registered with the 
Commission. The Commission estimates that the average amount of time 
per transfer agent needed to comply with the collection of information 
requirements of proposed Rule 17Ad-19 would be 40 hours per transfer 
agent for developing the written procedures. The Commission further 
estimates that the average amount of time per transfer agent per year 
to comply with the collection of information associated with recording 
and tracking cancelled securities certificates would be 50 hours per 
transfer agent per year, a figure that would vary greatly depending on 
the size of an entity and the volume of its business. Thus, assuming 
1,100 registered transfer agents, the start-up collection of 
information requirements would require about 44,000 hours (40  x  
1,100), and the annual collection of information requirements would be 
about 55,000 hours (50  x  1,100). Thus, the combined total during the 
first year would be about 99,000 hours.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility;
    (2) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collections of information;
    (3) Enhance the quality, utility, and clarity of the information to 
be collected;
    (4) Minimize the burden of the collections of information on those 
who are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Person desiring to submit comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609, with reference to File No. S7-18-00. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, should refer to 
File No. S7-18-00, and be submitted to the Securities and Exchange 
Commission, Office of Filings and Information. OMB is required to make 
a decision concerning the collections of information between 30 and 60 
days after publication, so a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days of publication.

IX. Statutory Basis and Text of Proposed Amendments

Statutory Basis

    Pursuant to the Securities Exchange Act of 1934 and particularly 
Sections 17(a), 17A(d), and 23(a) thereof, 15 U.S.C. 78q-1(d) and 
78w(a), the Commission proposes to adopt Sec. 240.17Ad-19 of Title 17 
of the Code of Federal Regulation in the manner set forth below.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements; Securities.

Text of Proposed Rules

    In accordance with the foregoing, the Commission proposes to amend 
Part 240 of Chapter II of Title 17 of the Code of Federal Regulations 
as follows:

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.
* * * * *
    2. Section 240.17f-1 is amended by:
    a. Adding paragraphs (a)(6), (a)(7) and (a)(8);
    b. Revising the phrase ``lost in transit'' to read ``lost, missing, 
or stolen while in transit'' in paragraph (c)(2)(i);
    c. Redesignating paragraphs (c)(2)(ii) and (c)(2)(iii) as 
paragraphs (c)(2)(iii) and (c)(2)(iv);
    d. Adding new paragraph (c)(2)(ii); and
    e. Adding paragraph (d)(3) to read as follows:


Sec. 240.17f-1  Requirements for reporting and inquiry with respect to 
missing, lost, counterfeit or stolen securities.

    (a) * * *
    (6) The term securities certificate means any physical instrument 
that represents or purports to represent ownership in a security that 
was printed by or on behalf of the issuer thereof and shall include any 
such instrument that is or was:
    (i) Printed but not issued;
    (ii) Issued and outstanding including treasury securities;
    (iii) Cancelled, which for this purpose means either or both of the 
procedures set forth in Sec. 240.17Ad-19(a)(1); or

[[Page 59773]]

    (iv) Counterfeit or reasonably believed to be counterfeit.
    (7) The term issuer shall include an issuer's:
    (i) Transfer agent(s), paying agent(s), tender agent(s), and 
person(s) providing similar services; and
    (ii) Corporate predecessor(s) and successor(s).
    (8) The term missing shall include any securities certificate that:
    (i) Cannot be located or accounted for, but is not believed to be 
lost or stolen; or
    (ii) A transfer agent claims or believes was destroyed in any 
manner other than by the transfer agent's own certificate destruction 
procedures as provided in Secs. 240.17Ad-19(b) and (c).
* * * * *
    (c) * * *
    (2) * * *
    (ii) Where a shipment of securities certificates is in transit 
between any transfer agents, banks, brokers, dealers, or other 
reporting institutions, relationship between such entities, and the 
delivering institution fails to receive notice of receipt or non-
receipt of the certificates, the delivering institution shall act to 
determine the facts. In the event of non-delivery where the 
certificates are not recovered by the delivering institution, the 
delivering institution shall report the certificates as lost, stolen, 
or missing to the Commission or its designee within a reasonable time 
under the circumstances but in any event within ten business days from 
the date of shipment.
* * * * *
    (d) * * *
    (3) A reporting institution shall make required inquiries by the 
end of the fifth business day after a securities certificate comes into 
its possession or keeping, provided that such inquiries shall be made 
before the certificate is sold, used as collateral, or sent to another 
reporting institution.
* * * * *
    3. Section 240.17Ad-7, paragraph (i), is amended by revising the 
phrase ``Sec. 240.17Ad-17(c)'' to read ``Secs. 240.17Ad-17(c) and 
240.17Ad-19(c)''.
    4. Amend Sec. 240.17Ad-12, paragraph (a)(1), by revising the phrase 
``risk of destruction, theft or other loss;'' to read ``risk of theft, 
loss or destruction (other than by a transfer agent's certificate 
destruction procedures pursuant to Sec. 240.17Ad-19);'' and adding 
paragraph (b) to read as follows:


Sec. 240.17Ad-12  Safeguarding of funds and securities.

* * * * *
    (b) For purposes of this section, the term securities shall include 
the term securities certificate as defined in Sec. 240.17f-1(a)(6).
    5. Section 240.17Ad-19 is added to read as follows:


Sec. 240.17Ad-19  Requirements for cancellation, storage, and 
destruction of securities certificates.

    (a) Definitions. For purposes of this section:
    (1) The terms cancelled or cancellation means the process in which 
a securities certificate:
    (i) Is physically marked to clearly indicate that it no longer 
represents a claim against the issuer; and
    (ii) Is voided on the records of the transfer agent.
    (2) The term cancelled certificate facility means any location 
where securities certificates are cancelled, stored, or destroyed.
    (3) The term certificate number means a unique identification or 
serial number that is assigned and affixed by an issuer or transfer 
agent to each securities certificate.
    (4) The term controlled access means the practice of permitting the 
entry of only authorized personnel to areas where cancelled securities 
certificates are processed, stored, or destroyed.
    (5) The term CUSIP number means the unique identification number 
that is assigned to each securities issue. The same CUSIP number 
appears on the face of each securities certificate of the same 
securities issue.
    (6) The term destruction means the physical ruination of a 
securities certificate by a transfer agent as part of the certificate 
destruction procedures that make the reconstruction of the certificate 
impossible.
    (7) The term securities certificate has the same meaning that it 
has in Sec. 240.17f-1(a)(6).
    (b) Required procedures for the cancellation, storage, 
transportation, and destruction of securities certificates.
    Every transfer agent involved in the keeping, handling, or 
processing of securities certificates shall establish and implement 
written procedures that describe the transfer agent's procedures for 
the cancellation, storage, transportation, and destruction of such 
securities certificates. This requirement applies to any agent that the 
transfer agent uses to perform any of these activities.
    (c) Written procedures. The written procedures required by 
paragraph (b) of this section at a minimum, shall:
    (1) Provide controlled access to any cancelled certificate 
facility;
    (2) Unless existing procedures will cause the destruction of 
cancelled certificates within 72 hours of their cancellation, provide 
that each cancelled certificate is clearly marked with the word 
``CANCELLED'' by stamp or perforation on the face of the certificate;
    (3) Require a retrievable electronic record containing the CUSIP 
number, certificate number with any prefix or suffix, denomination, 
registration, issue date, and cancellation date of each cancelled 
certificate within the transfer agent's possession or control;
    (4) Require, pursuant to a certificate destruction procedure, a 
retrievable electronic record of each destroyed securities certificate; 
the records must contain for each destroyed certificate the CUSIP 
number, certificate number with any prefix or suffix, denomination, 
registration, issue date, and cancellation date;
    (5) Require that the physical transportation of cancelled 
certificates be made in a secure manner and that the transfer agent 
maintain a record of the CUSIP number and certificate number of each 
certificate in transit;
    (6) Require, pursuant to a certificate destruction procedure, that 
authorized personnel of the transfer agent or its designee supervise 
and witness the intentional destruction of any cancelled certificate 
and retain copies of all records relating to certificates which were 
destroyed; and
    (7) Provide for the reporting to the Lost and Stolen Securities 
Program in a timely and complete manner, pursuant to Sec. 240.17f-1, 
any cancelled certificate that is lost, stolen, missing, or 
counterfeit.
    (d) Recordkeeping. Every transfer agent subject to this section 
shall maintain records which demonstrate compliance with the 
requirements set forth in this section and which describe the transfer 
agent's methodology for complying with this section.
    (e) Exemptive authority. Upon written application or upon its own 
motion, the Commission may grant an exemption from the provisions of 
this section, either unconditionally or on specific terms and 
conditions, to any transfer agent or any class of transfer agents and 
to any securities certificate or any class of securities certificates.

By the Commission.

    Dated: October 2, 2000.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-25773 Filed 10-5-00; 8:45 am]
BILLING CODE 8010-01-U


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