[Federal Register Volume 61, Number 121 (Friday, June 21, 1996)]
[Notices]
[Pages 31989-31991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15908]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37314; File No. SR-DTC-96-08]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Accelerated Approval of a Proposed Rule Change To 
Establish a Custody Service for Certain Non-Depository Eligible 
Securities

June 14, 1996.
    On April 2, 1996, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DTC-96-08) pursuant to Section 19(b)(1) of the 
Securities

[[Page 31990]]

Exchange Act of 1934 (``Act'') \1\ to establish a custody service for 
certain non-depository eligible securities. Notice of the proposal was 
published in the Federal Register on June 7, 1996.\2\ No comment 
letters were received. For the reasons discussed below, the Commission 
is granting accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ Securities Exchange Act Release No. 37256 (May 30, 1996), 61 
FR 29158.
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I. Description

    The rule change will establish a method by which the securities 
industry can 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 all DTC 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 more detailed description of DTC's proposed Custody 
Services is set forth in Exhibit B, ``DTC Custody Service,'' to the 
filing, 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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    The Custody Service will be implemented in three phases. This order 
approves implementation of the first two phases.\5\ As each phase is 
introduced, additional services will be offered to DTC participants. 
During Phase I, DTC will accept deposits, process withdrawals, and 
transfer eligible Custody Issues into a participant's general free 
account. DTC will designate two segregated (``seg'') accounts of the 
participant's DTC general account for Custody Service use. One seg 
account will be utilized to reflect securities on deposit with DTC that 
are stored in DTC's vault (``custody free account''). The second seg 
account will be utilized to reflect previously deposited securities 
placed in-transit (``custody transfer account'').\6\
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    \5\ Phase I will be implemented immediately and Phase II will be 
implemented in several months. DTC will be required to notify the 
Commission in writing thirty days prior to the scheduled 
implementation of Phase II of the Custody Service or sooner, if 
known. If there are deviations in the manner of implementation or in 
the operation of Phase II from those that are described in the 
proposed rule change (File No. SR-DTC-96-08), DTC will be required 
to file a proposed rule change in accordance with Section 19(b)(1) 
of the Act prior to commencement of operation of Phase II. In 
addition, DTC will be required to file a proposed rule change 
pursuant to Section 19(b)(1) prior to implementation of Phase III 
because Phase III operations will require additional development to 
accommodate the processing of stock dividends.
    \6\ For example, a participant having previously deposited into 
the Custody Service a certificate (``certificate No. 1'') 
representing 1,000 shares of a Custody Issue registered in the name 
of ABC submits a withdrawal-by-transfer (``WT'') instruction to 
register 100 shares of such stock in the name of XYZ with the 
balance to remain registered in the name of ABC. Upon receipt of the 
WT request, DTC will (i) decrease the participant's custody free 
account by 1,000 shares, (ii) increase the participant's custody 
transfer account by 1000 shares, and (iii) delete certificate No. 1 
from the custody certificate database (described infra note 7). 
Certificate No. 1 and the WT instructions then will be forwarded to 
the transfer agent. When DTC receives the newly issued certificates 
from the transfer agent, DTC will (i) decrease the participant's 
custody transfer account by 1000 shares, (ii) deliver the 
certificate representing 100 shares to ABC as prescribed by the WT 
instructions, (iii) increase the participant's custody free account 
by 900 shares, and (iv) add the certificate representing 900 shares 
to the custody certificate database.
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    DTC participants will access the Custody Service through a new 
participant terminal system (i.e., DTC's PTS System) application that 
will interface with the custody certificate database \7\ in a real time 
manner and will provide separate Custody Service inquiry and processing 
options. The inquiry options will enable participants to retrieve and 
view certificate level detail of Custody Service deposits stored in the 
custody certificate database. In addition to the PTS function, 
participants will be able to submit Custody Service transactions 
through existing DTC outputs including computer-to-computer, main frame 
dual host, and the distributed program link.
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    \7\ The custody certificate database will reflect the 
certificate number, denomination, issuance date, registration, and 
other pertinent details of each certificate deposited into the 
Custody Service.
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    Phase II 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.\8\ In addition, DTC 
participants will be able to utilize DTC's Reorg Deposit Service \9\ 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 transferrable 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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    \8\ DTC will require its participants to notify DTC of 
redemptions and reorganizations involving Custody Issues where DTC 
has not already announced such an activity.
    \9\ 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 Phase III of the Custody Service, DTC will implement the 
capability to collect and distribute dividend and interest payments for 
Custody Issues. DTC 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.\10\
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    \10\ Supra, note 5.
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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) \11\ under the Act. In accordance with the requirements 
for the satisfactory control of securities set forth in Rule 15c3-
3(c)(5),\12\ 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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    \11\ 17 CFR 240.15c3-3(b) (1995).
    \12\ 17 CFR 240.15c3-3(c) (1995).
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II. Discussion

    Section 17A(b)(3)(F) \13\ of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions and to assure the 
safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible. The 
Commission believes DTC's proposed

[[Page 31991]]

rule change is consistent with DTC's obligations under Section 17A of 
the Act because the rule change will allow DTC participants to remove 
certificates representing Custody Issues from their vaults and to 
deposit them into the Custody Service at DTC. Depositing certificates 
into the Custody Service along with the correspondent eligibility of 
Custody Issues for certain DTC securities processing services should 
help to reduce the costs, inefficiencies, and risks associated with the 
physical safekeeping of these securities outside of DTC and thereby 
should promote the prompt and accurate clearance and settlement of 
transactions in and the safeguarding of these types of securities. 
Moreover, the Commission believes the proposal is consistent with DTC's 
obligations to safeguard securities and funds under its control because 
Custody Issues on deposit at DTC 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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    \13\ 15 U.S.C.Sec. 78q-1(b)(3)(F) (1988).
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    DTC has requested that the Commission find good cause for approving 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of the filing. The Commission finds good cause 
for so approving the proposed rule change because accelerated approval 
will permit DTC participants to begin immediately the process of 
transferring Custody Issues to DTC in order that they may utilize the 
Custody Service as soon as possible. Furthermore, the Commission has 
not received any comment letters and does not expect to receive any 
comment letters on the proposal.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular Section 17A of the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-96-08) be and hereby is 
approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-15908 filed 6-20-96; 8:45 am]
BILLING CODE 8010-01-M