Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Notices 26239

believes that it is highly unlikely that

purchases of these securities by a Series

would have any significant impact on

the market value of any such securities.

6. Another potential conflict of

interest discussed by applicant could

occur if an investment company

directed brokerage to a broker-dealer in

which the company has invested to

enhance the broker-dealer’s profitability

or to assist it during financial difficulty,

even though the broker-dealer may not

offer the best price and execution. To

preclude this type of conflict, applicant

and each Series agree, as a condition of

this application, that no company held

in the portfolio of a Series nor any

affiliate thereof will act as broker for any

Series in the purchase or sale of any

security for its portfolio.

7. Applicant states that the requested

relief is appropriate in the public

interest and consistent with the

protection of investors and the purposes

fairly intended by the policy and

provisions of the Act.

Applicant’s Condition

Applicant agrees that the requested

exemptive order may be conditioned

upon no company held in the portfolio

of a Series nor any affiliate thereof,

acting as broker for any Series in the

purchase or sale of any security for the

Series’ portfolio.

For the SEC, by the Division of Investment

Management, under delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–13141 Filed 5–23–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37223; File No. SR–NASD–

96–17]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

National Association of Securities

Dealers, Inc. Relating to the Definitions

of Bona Fide Independent Market and

Bona Fide Independent Market Maker

May 17, 1996.

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

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on April 24, 1996, the

National Association of Securities

Dealers, Inc. (‘‘NASD’’ or ‘‘Association’’)

filed with the Securities and Exchange

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

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the NASD. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

The Proposed Rule Change

The NASD is herewith filing a

proposed rule change to Rule 2720 of

the NASD’s Conduct Rules to amend the

definitions of ‘‘Bona fide independent

market’’ and ‘‘Bona fide independent

market maker.’’ Below is the text of the

proposed rule change. Proposed new

language is italicized; proposed

deletions are in brackets.

Conduct Rules

2000. Business Conduct

* * * * *

2700. Securities Distributions

2720. Distribution of Securities of

Members and Affiliates—Conflicts of

Interest

(a) General

(1) No member or person associated

with a member shall participate in the

distribution of a public offering of debt

or equity securities issued or to be

issued by the member, the parent of the

member, or an affiliate of the member

and no member or parent of a member

shall issue securities except in

accordance with this Rule.

(2) No member or persons associated

with a member shall participate in the

distribution of a public offering of debt

or equity securities issued or to be

issued by a company if the member and/

or its associated persons, parent or

affiliates have a conflict of interest with

the company, as defined herein, except

in accordance with this Rule.

(b) Definitions

For purposes of this Rule, the

following words shall have the stated

meanings:

(1) and (2) No change.

(3) Bona fide independent market—a

market in a security which:

(A) Is registered pursuant to the

provisions of Sections 12(b) or 12(g) of

the Act or issued by a company subject

to Section 15(d) of such Act, unless

exempt from those provisions;

ø(B) Has an aggregate trading volume

for the 12 months immediately

preceding the filing of the registration

statement of at least 100,000 shares;¿

ø(C) Has outstanding for the entire 12

month period immediately preceding

the filing of the registration statement, a

minimum of 250,000 publicly held

shares; and¿

ø(D) In the case of over-the-counter

securities, has had at least three bona

fide independent market makers for a

period of at least 30 days immediately

preceding the filing of the registration

statement and the effective date of the

offering.¿

(B) Has a market price as of the close

of trading on the trade date immediately

preceding filing of the registration

statement or offering circular of five

dollars or more per share, and which

has traded at a price of five dollars or

more per share in at least 20 of the 30

trading days immediately preceding the

filing of the registration statement or

offering circular; and

(C) For at least 90 calendar days

immediately preceding the filing of the

registration statement or offering

circular with the Department:

(i) Has been listed on and is in

compliance with the requirements for

continued listing on a national

securities exchange; or

(ii) Has been listed on and is in

compliance with the requirements for

continued listing on The Nasdaq Stock

Market and has had at least two bona

fide independent market makers for a

period of at least 30 trading days

immediately preceding the filing of the

registration statement and the effective

date of the offering; and

(D) For the 90 calendar day period

immediately preceding the filing of the

registration statement or offering

circular:

(i) Has an aggregate trading volume of

at least 500,000 shares; or

(ii) Has outstanding a minimum of

5,000,000 publicly held shares.

(4) Bona fide independent market

maker—a market maker which:

ø(A) Continually maintains net capital

as determined by Rule 15c3–1 under the

Act, of $50,000 or $5,000 for each

security in which it makes a market,

whichever is less;¿

ø(B) Regularly publishes bona fide

competitive bid and offer quotations in

a recognized interdealer quotation

system;¿

ø(C) Furnishes bona fide competitive

bid and offer quotations to other brokers

and dealers on request; and¿

((D) Stands ready, willing and able to

effect transactions in reasonable

amounts, and at his quoted prices, with

other brokers and dealers.)

(A) Is registered as a Nasdaq market

maker in the security to be distributed

pursuant to this Schedule;

(B) Is not an affiliate of the entity

issuing securities pursuant to paragraph

(c) of this Schedule and, together with

its associated persons, does not in the

aggregate beneficially own, at the time

of the filing of the registration statement

and at the commencement of the

distribution, five percent or more of the

outstanding voting securities of such

entity which is a corporation or

beneficially own a partnership interest
26240 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Notices

in five percent or more of the

distributable profits or losses of such

entity which is a partnership; and

(C) Is not a recipient of any of the net

proceeds of the offering.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

NASD 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. The NASD has

prepared summaries, set forth in

Sections (A), (B), and (C) below, of the

most significant aspects of such

statements.

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Introduction and Background

Rule 2720 of the NASD’s Conduct

Rules (the ‘‘Rule’’) (formerly, Schedule

E to the NASD’s By-Laws) addresses the

concern that public investors be

adequately protected against conflicts of

interest regarding the conduct of due

diligence and pricing of securities when

investing in securities issued by an

NASD member, its parent or an affiliate

of a member that is going public or by

an issuer with which the member has a

conflict of interest (‘‘Rule 2720

offering’’). The Rule prohibits a member

from underwriting or participating in

the underwriting or distribution of a

Rule 2720 offering of equity or debt

unless the price of the equity offering is

established no higher, or the yield of the

debt offering is established no lower,

than the price recommended by a

qualified independent underwriter, who

shall also participate in the preparation

of the registration statement and

prospectus, offering memorandum, or

similar document, and exercise usual

standards of ‘‘due diligence’’ regarding

the offering. Rule 2720 provides an

exception from the qualified

independent underwriter requirement

for offerings of equity securities for

which a bona fide independent market

exists. Rule 2720 defines a bona fide

independent market as a market in a

security which has, among other things,

at least three bona fide independent

market makers.

The NASD has reviewed the

definitions of bona fide independent

market and bona fide independent

market maker, which were part of the

original version of Rule 2720 when it

was adopted as Schedule E in 1972. The

NASD is proposing to revise the

definitions to incorporate new

requirements for listing, public float,

trading volume, price, number of bona

fide independent market makers, and

limitations on the relationship of the

bona fide independent market maker to

the issuer that will significantly

improve the criteria used for

determining that a market of sufficient

depth and duration exists to constitute

an efficient pricing mechanism for the

securities to be distributed. The NASD

believes that the proposed new

definitions will permit members, in

appropriate situations, to conduct a

secondary offering without the burden

and expense of engaging a qualified

independent underwriter, while

ensuring the public that the added

protection of a qualified independent

underwriter will be required in

situations where the market cannot be

relied on to price the securities

appropriately.

Description of Proposed Amendments

Bona Fide Independent Market

Definition

Registration Requirement

The proposed rule change retains the

current requirement in the definition of

bona fide independent market that it

must be a market in a security which is

registered pursuant to Sections 12(b) or

12(g) of the Act or issued by a company

subject to Section 15(d) of that Act.

Price Requirement

The current definition of bona fide

independent market does not contain a

price requirement. The NASD is

concerned that a public float

requirement, as set forth below, without

a corresponding standard for the market

price of the securities does not establish

a valid benchmark for a bona fide

independent market. Therefore, the

NASD is proposing to adopt a new

provision in the definition of a bona fide

independent market that would require

that the security have a market price of

at least $5 a share as of the close of

trading on the day immediately

preceding the filing of the registration

statement or offering circular, and have

traded at a price of $5 or more per share

on at least 20 of the 30 trading days

immediately preceding the date on

which the offering circular or

registration statement was filed.

Listing and Market Maker Requirement

The current definition of bona fide

independent market does not contain a

listing requirement. The NASD believes

that a listing on a national securities

exchange or The Nasdaq Stock Market

indicates that the security trades in an

efficient, regulated, and active market

and would bring to the definition of

bona fide independent market the

qualitative standards of a regulated

trading environment, such as quote

transparency and real-time transaction

reporting. Therefore, the NASD is

proposing to adopt as one of the

requirements for the definition of a bona

fide independent market that the

security, for at least 90 calendar days

immediately preceding the filing of the

registration statement or offering

circular, have been listed on, and is in

compliance with, the requirements for

continued listing on (i) a national

securities exchange, or (ii) The Nasdaq

Stock Market so long as such Nasdaq

listing has two bona fide independent

market makers for a period of at least 30

trading days immediately preceding the

filing of the registration statement or

offering circular and the effective date of

the offering. Securities quoted on the

NASD OTC Bulletin Board service and

those traded in the general over-thecourter market, such as the ‘‘pink

sheets,’’ cannot rely on this

requirement.

The proposed requirement that the

security have at least two bona fide

independent market makers for listings

on the Nasdaq Stock Market would

replace the current requirement of at

least three bona fide independent

market makers. Given that a security is

permitted to be listed on the Nasdaq

Stock Market with two market makers,

the NASD believes that two market

makers are sufficient to demonstrate the

presence of a bona fide independent

market away from any Rule 2720

affiliate that may also be making a

market in the issuer’s securities.

Trading Volume and Public Float

Requirement

The current definition of bona fide

independent market contains

independent requirements for trading

volume and public float. Under the

current rule, a security is considered to

have a bona fide independent market if,

for the 12 months immediately

preceding the filing of the registration

statement, it has both an aggregate

trading volume of at least 100,000

shares and a minimum of 250,000

publicly held shares. Under the

proposed rule change, the requirements

for trading volume and public float will

be in the alternative. That is, for a bona

fide independent market to exist, the

proposed rule would require a security

to have for the 90 calendar day period
Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Notices 26241

1The term ‘‘follow-on’’ offering refers to a

secondary offering of shares by the issuer. 2 15 U.S.C. 78o–3.

immediately preceding the filing of the

registration statement or offering

circular either an aggregate trading

volume of at least 500,000 shares or a

minimum of 5,000,000 publicly held

shares outstanding.

The NASD believes that raising the

current aggregate 12-months trading

volume requirement of 100,000 shares

to 500,000 shares in the 90-calendar-day

period before the filing of the

registration statement or offering

circular provides a criterion that is more

indicative of an active, current and,

therefore, efficient market. Such greater

price efficiency establishes a better

benchmark for justifying an exemption

from the requirement that a qualified

independent underwriter establish the

price of the offering.

The NASD considers the alternative

requirement of a five-million-share

public float as the minimum necessary

to assure that the market for an issuer’s

securities will not suffer undue

volatility from the dilution that occurs

when a large number of shares is offered

to the public. In this regard, the NASD

notes that a typical ‘‘follow-on’’

offering1 of a company’s stock adds

between one- and two-million shares to

the public float, which is equal to a 40

percent dilution at the five-millionshare level.

Bona Fide Independent Market Maker

Definition

The Rule currently defines a bona fide

independent market maker as one

which meets certain net capital

requirements, publishes bona fide bid

and ask quotations in a recognized

interdealer quotation system, furnishes

such quotes to other brokers and dealers

on request, and stands ready, willing

and able to effect transactions at quoted

prices with other brokers and dealers.

The current standards of the definition

were developed at the time the Rule was

adopted in 1972 as Schedule E and

applied to all securities in the over-thecounter market.

The NASD believes that the current

standards for the definition of bona fide

independent market maker are no longer

necessary in light of the proposed

requirement of the definition of bona

fide independent market that the

security be listed on The Nasdaq Stock

Market. Market makers for securities

listed on The Nasdaq Stock Market are

required to meet certain net capital

standards, publish bona fide bid and ask

quotations in Nasdaq, which is a

recognized interdealer quotation system,

furnish quotes to other brokers and

dealers on request, and stand ready,

willing and able to effect transactions at

quoted prices with other brokers and

dealers. Therefore, the NASD is

proposing that the current requirements

be incorporated into a single standard

requiring that the market maker be

registered as a Nasdaq market maker.

The NASD believes that the definition

of bona fide independent market maker

should also provide investors with

greater assurance that the market

maker’s activities are independent of

any influences that may arise when the

issuer’s ownership of securities or

interest in the offering becomes

material. Therefore, the NASD is also

proposing to adopt as part of the new

definition that a bona fide independent

market maker (i) must not be a recipient

of any of the net proceeds of the

offering, (ii) must not be an affiliate of

the entity issuing the securities, and,

(iii) together with its associated persons,

does not in the aggregate beneficially

own, at the time of the filing of the

registration statement or offering

circular, five percent or more of the

outstanding voting securities of the

entity issuing the securities, if a

corporation, or a five percent or more

partnership interest in the distributable

profits or losses of the entity, if a

partnership.

The NASD believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(6) of the

Act,2 which require that the Association

adopt and amend its rules to promote

just and equitable principles of trade,

and generally provide for the protection

of customers and the public interest in

that the proposed rule change, by

amending the requirements to qualify

for the exception to the qualified

independent underwriter requirement

for an equity security with a bona fide

independent market, significantly

improves the criteria used for

determining the presence of a bona fide

independent market for Rule 2720

offerings and reinforces the standard

that a bona fide independent market

should be stringent enough to assure the

public that a market of sufficient depth

and duration exists to constitute an

efficient pricing mechanism for the

securities to be distributed.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD does not believe that the

proposed rule change will result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

The proposed rule change was

published for comment in Notice to

Members 95–44 (June, 1995) (‘‘NTM 95–

44’’). Three (3) comment letters were

received in response. All 3 commenters

were in favor of the proposed rule

change; one commenter suggested

substantive changes to the proposed

rule change.

Sullivan and Cromwell (‘‘S&C’’)

suggested revisions to clarify the

meanings of the definitions of both

‘‘bona fide independent market’’ and

‘‘bona fide independent market maker’’

and to ease compliance with these

requirements.

Bona Fide Independent Market

Definition

The term ‘‘listing requirements’’ in

the version of the definition of ‘‘bona

fide independent market’’ published for

comment in NTM 95–44 would have

required compliance with listing

requirements on a national securities

exchange or the Nasdaq Stock Market.

S&C stated it presumed that this

requirement referred to maintenance

criteria rather than original listing

standards since the definition would

otherwise exclude various issuers

currently in compliance with

appropriate maintenance criteria for

continued listing but who, for various

reasons, no longer meet initial listing

standards.

The NASD agrees that the proposed

definition of ‘‘bona fide independent

market’’ was not intended to require

continuous satisfaction of initial listing

requirements of the Nasdaq Stock

Market or national securities exchanges.

Therefore, the proposed rule language

has been amended to specifically

require compliance with the

requirements for continued listing on

The Nasdaq Stock Market or a national

securities exchange.

The NASD also agrees with S&C that

the parenthetical ‘‘(Trading Volume

Test)’’ in Section 2(c)(4)(i) should be

deleted since the term is not used again

in the rule language.

S&C also stated that the definition of

‘‘bona fide independent market’’

appears to require compliance with

‘‘listing requirements’’ only on the filing

date of the registration statement and

not throughout the preceding 90

calendar days. The NASD believes that

the literal language of the proposed rule

is clear that compliance with the listing

requirements is required throughout the

90 calendar days preceding the filing of

the registration statement.
26242 Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Notices

3 ‘‘Beneficial Ownership’’ is defined in the Rule

to mean the right to the economic benefits of a

security.

Bona Fide Independent Market Maker

Definition

In the version of the proposed rule

change published for comment in NTM

95–44, ‘‘bona fide independent market

maker’’ was defined, in part, as a market

maker who is not affiliated with the

issuer and, together with its associated

persons, does not in the aggregate

beneficially own, at the time of the

filing of the registration statement, 5%

or more of the issuer’s outstanding

voting securities, common equity,

preferred equity, or subordinated debt

(‘‘five percent requirement’’). The NASD

stated in NTM 95–44 that the proposed

new standards for the definition of bona

fide independent market maker were

largely drawn from the current

definition of qualified independent

underwriter in the Rule and from the

current definition of qualified

independent underwriter in the Rule

and from the reporting requirements

imposed on beneficial owners by

Section 13 of the Act. S&C objected to

the five percent requirement on a

number of grounds.

First, S&C stated that there is a

fundamental difference between

qualified independent underwriters and

bona fide independent market makers

that makes it inappropriate to apply the

same standards to each. In particular, a

qualified independent underwriter

directly participates in the offering

process and is usually a party to an

agreement with the issuer outlining

each party’s responsibilities under the

Rule. A registered market maker for a

Nasdaq-listed stock, however, might not

be a participant in the distribution and

thus not a party to any agreement with

either the issuer or the managing

underwriter. Thus, a market maker

could not be compelled, contractually or

otherwise, to divulge the information

needed for the issuer and managing

underwriter to determine whether the

market maker qualifies under the five

percent requirement as a bona fide

independent market maker.

Second, S&C stated that, contrary to

the suggestion in NTM 95–44, the issuer

and managing underwriter cannot

necessarily obtain the required

information from filings made by market

makers under Section 13 of the Act.

Section 13 (d) and (g) filing

requirements apply only to acquisitions

of equity securities that are ‘‘voting

securities’’ and do not provide

information regarding a market maker’s

investment in an issuer’s nonconvertible preferred stock or

subordinated debt. Additionally, under

Exchange Act Rule 13d–1(b)(1), many

market makers which beneficially own

more than five percent (but less than ten

percent) of an issuer’s outstanding

voting securities will not be required to

file any related disclosure statement

under Section 13, thus eliminating the

need to file a Schedule 13 regarding

registered equity securities acquired by

them in the ordinary course of business

and not with the purpose or effect of

changing or influencing the control of

the issuer.

Third, S&C noted that the five percent

requirement prohibits a bona fide

independent market maker from holding

a five percent securities position either

at the filing date or at the

commencement of the distribution. S&C

stated that a market maker not

participating in the distribution, who

would otherwise qualify as a bona fide

independent market maker on the filing

date, might very well refuse to provide

any undertakings to the issuer regarding

the securities positions it will hold on

the commencement date. Consequently,

an issuer may be unable to ensure that

a broker-dealer who qualifies as a bona

fide independent market maker on the

filing date will remain so qualified on

the commencement date.

Finally, S&C noted that the definition

of bona fide independent market maker

proposed in NTM 95–44 requires that

securities ownership by the member’s

associated persons and immediate

family members, parents, and affiliates

be aggregated for purposes of the five

percent limitation, whereas the current

definition of qualified independent

underwriter does not require such

aggregation. S&C stated that it is odd to

include such an aggregation

requirement in view of the fact that

NTM 95–44 stated that the proposed

definition of bona fide independent

market maker is intended, in part, to

conform to the current definition of

qualified independent underwriter.

S&C recommended that the NASD

either delete the five percent ownership

requirement entirely or at least that

element of the five percent requirement

that requires aggregation of ‘‘associated

persons and their immediate family,

parents and affiliates.’’

The NASD agrees that the nature of

Section 13 filing requirements appears

to make such reporting an inadequate

substitute source of information for

ensuring compliance with the definition

of bona fide independent market maker

proposed in NTM 95–44. Therefore, the

NASD has eliminated the requirement

that a bona fide independent market

maker have no more than a five percent

beneficial ownership position in the

non-voting securities of an issuer

including common equity, preferred

equity, and subordinated debt, but has

retained the five percent ownership

requirement with respect to the issuer’s

voting securities. The NASD believes

that if a market of sufficient depth and

liquidity exists to meet the other

stringent requirements of the definition

of a bona fide independent market, then

the integrity of the pricing of the

offering is preserved regardless of

whether one or more market makers

hold positions in the issuer’s non-voting

securities.

The NASD also agrees that the

requirements for a bona fide

independent market maker proposed in

NTM 95–44 are more stringent than the

current requirements imposed on a

qualified independent underwriter

under the Rule. Therefore, the NASD

has eliminated the requirement to

aggregate the ownership of the

immediate family, parents and affiliates

of the member and its associated

persons with any direct ownership by

the market maker and its associated

persons. However, when a bona fide

independent market maker and its

associated persons ‘‘beneficially own’’

voting securities of the same issuer, the

NASD considers aggregation of

ownership to be appropriate.3

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
Federal Register / Vol. 61, No. 102 / Friday, May 24, 1996 / Notices 26243

1 15 U.S.C. § 78s(b)(1) (1988).

2Letters from J. Keith Kessel, Esq., Compliance

Officer, Philadep, to Peter R. Geraghty, Esq., Senior

Counsel, Division of Market Regulation,

Commission (March 20, March 22, March 28, and

April 1, 1996).

3The Commission has modified the text of the

summaries submitted by PHILADEP.

4Customer name securities refer to securities that

are registered in the name of the beneficial owner.

5Philadep will segregate all customer name

certificates from nominee name certificates in its

vault.

6For customer name securities that are not

depository eligible at the time a transfer request is

made, Philadep will perform all necessary due

diligence on such securities to make them

depository eligible so that the securities can be

registered in Philadep’s nominee name and

subsequently available for book-entry delivery into

the participant’s general Philadep account.

7 In addition to reporting incoming deposits prior

to physical delivery, ADS will check securities

against Philadep’s certificate master file to ascertain

whether the securities possess a valid CUSIP

number.

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

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to the file

number in the caption above and should

be submitted by June 14, 1996.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96–13143 Filed 5–23–96; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–37229; File No. SR–

PHILADEP–95–12]

Self-Regulatory Organizations; The

Philadelphia Depository Trust

Company; Notice of Filing of a

Proposed Rule Change Seeking To

Establish a Centralized Office

Processing System

May 20, 1996.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

December 19, 1995, the Philadelphia

Depository Trust Company (‘‘Philadep’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) the

proposed rule change (File No. SR–

PHILADEP–95–12), which Philadep

amended on March 20, March 27, March

28, and April 1, 1996,2 as described in

Items I, II, and III below, which items

have been prepared primarily by

Philadep. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Philadep proposes of offer to its

participants a customer name

safekeeping and branch receive

processing service known as the

Centralized Office Processing Service

(‘‘COPS’’).

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Philadep included statements

concerning the purpose of and basis for

the proposed rule change and discussed

any comments that it received on the

proposed rule change. The text of these

statements may be examined at the

places specified in Item IV below.

Philadep has prepared summaries, set

forth in sections (A), (B), and (C) below,

of the most significant aspects of such

statements.3

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

COPS is a customer name 4

safekeeping and branch receive

processing service that Philadep

proposes to offer to interested

participants for both depository eligible

and ineligible securities provided that

all such securities have a valid CUSIP

number. The primary objective of COPS

is to allow Philadep participants to

utilize Philadep as a custodial agent for

customer name securities.

COPS is designed to offer brokerdealers the opportunity to eliminate a

labor intensive, low profit service from

the broker-dealers’ operations. Philadep

believes COPS will serve several

functions including relieving Philadep

participants from the processing and

auditing responsibilities associated with

receiving customer name securities,

reducing the costs Philadep participants

bear in connection with maintaining

safekeeping for physical certificates, and

centralizing more securities certificates

in a depository environment.

Under COPS, deliveries of customer

name certificates from Philadep

participants will be deposited into

Philadep’s vault for safekeeping.5 Upon

an appropriate instruction from the

submitting participant to withdrawn

positions held in customer name or if a

participant’s customer wishes to sell the

securities, Philadep may either (i) send

these certificates to the participant or

(ii) if the securities are depository

eligible and possess all necessary

endorsements and stock or bond

powers, forward them to the transfer

agent for reregistration into Philadep’s

nominee name and subsequently

deposit them into the participant’s

general Philadep account.6

As proposed, COPS also will permit

Philadep participants to collect, process,

and forward certificates and related

documentation directly to Philadep

from their branch offices. This enables

Philadep to operate as the participants’

central processing office. Thus, COPS

will eliminate steps in the ordinary

certificates routing process by allowing

participants’ branch offices to forward

these documents directly to Philadep.

The branch receive processing facility

will apply to both customer name

safekeeping positions and to ordinary

deposits that participants will forward

to the depository to be placed in

Philadep’s nominee name.

The COPS program will require

Philadep participants utilizing the new

service to send their securities to

Philadep through Philadep’s Automated

Deposit System (‘‘ADS’’). This will

allow Philadep participants to report

their deliveries to Philadep in advance

of the physical delivery.7 Philadep will

verify the contents of the incoming

deliveries and will provide intraday

reconciliation through computer-tocomputer capabilities. Philadep will

endeavor to resolve with the delivering

participant any discrepancies between

the ADS transmission and the contents

of the packages. If the participant does

not properly reconcile its submissions

with Philadep or supply the proper

instructions regarding these items

within thirty days, Philadep will

automatically send these exception

items back to the respective

participant’s branch or central office.

Philadep has not established fees for

COPS; therefore, prior to its

implementation, Philadep will file a

proposed rule change with the

Commission setting forth the fees for

COPS.

In connection with providing the

COPS service, Philadep believes that it

operates as a control location for

securities deposited into COPS within

the meaning of Section 15(c) of the Act

and Rule 15c3–3(c)(5) promulgated

thereunder. In accordance with 15c3–

3(c)(5), Philadep states (i) it qualifies as