[Federal Register Volume 61, Number 111 (Friday, June 7, 1996)]
[Notices]
[Pages 29158-29160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14357]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37256; File No. SR-DTC-96-08]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change To Establish a Custody 
Service For Certain Non-depository Eligible Securities

May 30, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 29159]]

(``Act''),\1\ notice is hereby given that on April 2, 1996, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change (File No. 
SR-DTC-96-08) as described in Items I, II, and III below, which items 
have been prepared primarily by DTC. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC is filing the proposed rule change to establish procedures for 
its Custody that will enable DTC participants that hold certain non-
depository eligible securities to deposit those securities with DTC for 
safekeeping and other limited depository services.

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

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

    The purpose of the proposed rule change is to establish a method by 
which the securities industry may centralize the safe-keeping of 
certificates which are not currently deposited at DTC because either 
the DTC participant desires that the certificate be held in customer or 
firm name or the issue is not eligible for full depository services 
(e.g., securities with certain transfer restrictions). The Custody 
Service will permit DTC participants to deposit such securities at DTC 
for safe-keeping and other limited depository services.\3\ Certificates 
deposited through the Custody Service will be held by DTC in customer 
or firm name and will not be transferred into DTC's nominee name. 
Therefore, a security issue deposited through the Custody Service 
(``Custody Issue'') will not be eligible for DTC's book-entry services 
unless a depositing participant directs DTC to transfer the position 
originally credited to the participant's custody free account to the 
participant's general free account.\4\
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    \3\ A description of DTC's proposed Custody Services is set 
forth in Exhibit B to the filing ``DTC Custody Service,'' which is 
available for review at the Commission's Public Reference Room.
    \4\ All necessary documents (e.g., stock powers or endorsements) 
to effect a legal transfer from customer or firm name to DTC's 
nominee name must be deposited with DTC prior to or 
contemporaneously with a participant's instruction to transfer the 
position from a participant's custody free account to the 
participant's general free account. Custody Issues eligible for 
transfer from a participant's custody free account to its general 
free account are those Custody Issues for which (i) all necessary 
documents of transfer are on deposit at DTC, (ii) there are no 
pending restrictions on transferability, and (iii) the issue is 
otherwise DTC eligible.
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    DTC believes that the Custody Service will provide brokers and 
dealers with appropriate control over Custody Issues for purposes of 
Rule 15c3-3(b) \5\ under the Act. In accordance with the requirements 
for the satisfactory control of securities set forth in Rule 15c3-
3(c)(5),\6\ DTC believes (i) it is a ``bank'' within the meaning of 
Section 3(a)(6) of the Act because it is a member bank of the Federal 
Reserve System, (ii) the delivery of Custody Issues to brokers and 
dealers will not require the payment of money or value, and (iii) the 
Custody Issues in DTC's custody or control will not be subject to any 
right, charge, security interest, lien, or claim of any kind in favor 
of DTC or any person claiming through DTC.
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    \5\ 17 CFR 240.15c3-3(b) (1995).
    \6\ 17 CFR 240.15c3-3(c) (1995).
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    The proposed Custody Service will be implemented in three phases. 
As each phase is introduced, additional services will be offered to DTC 
participants. During the first phase, DTC will accept deposits, process 
withdrawals, and transfer eligible Custody Issues into a participant's 
general free account. DTC also will respond to inquiries regarding 
custody deposits and offer automated and physical activity reports to 
participants.
    The second phase of the Custody Service will add redemption and 
reorganization services. When a custody position becomes the subject of 
a reorganization or redemption, DTC generally will report the event to 
its participants using existing services.\7\ In addition, DTC 
participants will be able to utilize DTC's Reorg Deposit Service \8\ to 
present eligible Custody Issues for mandatory reorganizations, full and 
partial calls, maturities, name changes, reverse splits, mergers, and 
other similar activities. Participants will be able to submit 
negotiable and transferable Custody Issues for voluntary 
reorganizations through existing, modified services. DTC also will 
collect and distribute the proceeds derived from the presentment of 
custody deposits.
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    \7\ DTC will require its participants to notify DTC of 
redemptions and reorganizations involving Custody Issues where DTC 
has not already announced such an activity.
    \8\ The Reorg Deposit Service enables DTC participants to 
deposit at DTC certificates for up to two years after the 
reorganization activity and to have DTC collect the proceeds on 
their behalf. For a complete description of DTC's Reorg Deposit 
Service, refer to Securities Exchange Act Release No. 34189 (June 9, 
1994), 59 FR 30818 [SR-DTC-94-06] (notice of filing and immediate 
effectiveness of proposed rule change).
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    In the third phase of the Custody Service, DTC will implement the 
capability to collect and distribute dividend and interest payments for 
Custody Issues registered in customer or firm name. Although DTC is 
seeking approval for each phase of the Custody Service, it intends only 
to implement Phase I at this time, with the other phases to follow in 
accordance with the experience and needs of DTC participants.
    DTC believes the proposed rule change will reduce the costs, 
inefficiencies, and risks associated with the physical safe-keeping of 
securities which are not current depository eligible at DTC because its 
participants will be able to reduce the inventories of securities in 
their physical vault and in turn should reduce their processing, labor, 
and insurance expenses. DTC believes the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to DTC in that it promotes 
efficiencies in the prompt and accurate clearance and settlement of 
securities transactions. Moreover, DTC believes the proposed service 
establishes uniform procedures for clearance and settlement which will 
reduce unnecessary costs and increase the protection of investors and 
persons facilitating transactions by and acting on behalf of investors. 
DTC also believes the proposed rule change supports industry efforts to 
immobilize securities certificates and maximize efficiencies in 
securities processing.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act, in the public interest, and for the protection 
of investors.

[[Page 29160]]

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

    DTC has not solicited comments from its participants on the 
proposed rule change. A number of DTC participants have requested that 
DTC develop a custody service and informally have committed to using 
such a service.

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

    Within thirty-five 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 ninety 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 DTC consents, the Commission will:
    (A) by order approve such proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. Sec. 552, will be available for inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of DTC. All 
submissions should refer to the file number SR-DTC-96-08 and should be 
submitted by June 28, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-14357 Filed 6-6-96; 8:45 am]
BILLING CODE 8010-01-M