33496 Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 

8Securities Exchange Act Release No. 55293 

(February 14, 2007), 72 FR 8033 (February 22, 2007) 

(SR–NYSE–2006–120). 9The NASDAQ OMX audit committee is 

composed of four or five directors, all of whom 

must be independent under the standards 

established by Section 10A(m) of the Act and the 

listing rules of The NASDAQ Stock Market LLC. All 

committee members must be able to read and 

understand financial statements, and at least one 

member must have past employment experience in 

finance or accounting, requisite professional 

certification in accounting, or any other comparable 

experience or background that results in the 

individual’s financial sophistication. 

10Specifically, BX states that: the NASDAQ OMX 

audit committee has broad authority to review the 

financial information that will be provided to 

shareholders and others, systems of internal 

controls, and audit, financial reporting and legal 

and compliance processes and, because NASDAQ 

OMX’s financial statements are prepared on a 

consolidated basis that includes the financial 

results of NASDAQ OMX’s subsidiaries, including 

BX, the NASDAQ OMX audit committee’s purview 

necessarily includes these subsidiaries. In addition, 

BX states that the NASDAQ OMX audit committee 

currently is charged with providing oversight over 

financial reporting and independent auditor 

selection for NASDAQ OMX and all of its 

subsidiaries, including BX, and the NASDAQ OMX 

audit committee has general responsibility for 

oversight over internal controls and direction and 

oversight over the internal audit function for 

NASDAQ OMX and all of its subsidiaries. See 

Notice, 74 FR at 23460. 

11See Notice, 74 FR at 23460–61. 

12See Notice, 74 FR at 23461. 

13 Id. 

14See BX By-Laws Article I(t). Staff Directors are 

directors of BX that are also serving as officers. 

Because the BX board would not be responsible for 

setting the compensation of any Staff Directors who 

are also officers of NASDAQ OMX, these directors 

would be permitted to participate in discussions 

concerning compensation of BX employees, but BX 

states that they must recuse themselves from a vote 

on the subject to allow the determination to be 

made by directors that are not officers or employees 

of BX. BX also states that, if a Staff Director is not 

also an employee of NASDAQ OMX, that Staff 

Director must also absent himself or herself from 

any deliberations regarding his or her 

compensation. 

15BOXR is the subsidiary of BX that has been 

delegated responsibility to regulate the market 

operated by Boston Options Exchange Group LLC 

(‘‘BOX’’), an options exchange that is a facility of 

BX but in which neither BX nor any of its affiliates 

has a financial interest. Section 17 of the By-Laws 

of BOXR (which are part of its Limited Liability 

Company Agreement) provides that the 

compensation of BOXR’s officers shall be 

determined by the BOXR Board. Because of BOXR’s 

special status as a regulatory subsidiary, this 

provision will remain operative following the 

implementation of the rule change proposed by this 

filing. The Commission notes that, under the ByLaws, BX’s regulatory oversight committee must be 

informed about the compensation and promotion or 

termination of the BX chief regulatory officer and 

the reasons therefor, to allow it to provide oversight 

over decisions affecting this key officer. See BX ByLaws Section 4.13(e). 

16See supra note 8. 

17 15 U.S.C. 78s(b)(2). 

18 17 CFR 200.30–3(a)(12). 

previously approved a structure in 

which certain committees of the board 

of directors of NYSE Euronext, 

including the audit and compensation 

committees, were authorized to perform 

functions for various subsidiaries, 

including the New York Stock 

Exchange, LLC (‘‘NYSE’’).8

The BX Audit Committee. Currently, 

the BX audit committee is primarily 

charged with: (1) Overseeing BX’s 

financial reporting process; (2) 

overseeing the systems of internal 

controls established by management and 

the BX board, as well as the legal and 

compliance process; (3) selection and 

evaluation of independent auditors; and 

(4) direction and oversight of the 

internal audit function. BX states that 

the NASDAQ OMX audit committee 9

will assume the duties currently 

performed by the BX audit committee 

once that committee is eliminated. The 

Exchange states that the responsibilities 

of BX’s audit committee are fully 

duplicated by the responsibilities of the 

NASDAQ OMX audit committee.10 In 

addition, BX states that its regulatory 

oversight committee has broad authority 

to oversee the adequacy and 

effectiveness of BX’s regulatory and selfregulatory organization responsibilities, 

and therefore is able to maintain 

oversight over internal controls in 

tandem with the NASDAQ OMX audit 

committee. Further, BX states that the 

practice of NASDAQ OMX’s Internal 

Audit Department (‘‘Department’’),11

which performs internal audit functions 

for all NASDAQ OMX subsidiaries, is to 

report to the BX regulatory oversight 

committee on all internal audit matters 

relating to BX, which will be formally 

reflected in the Department’s written 

procedures. BX also represents that, to 

ensure that the BX board retains 

authority to direct the Department’s 

activities with respect to BX, the 

Department’s written procedures will be 

amended to stipulate that the BX 

regulatory oversight committee may, at 

any time, direct the Department to 

conduct an audit of a matter of concern 

to it and report the results of the audit 

both to the BX regulatory oversight 

committee and the NASDAQ OMX audit 

committee.12

BX Management Compensation 

Committee. BX also proposes to 

eliminate its compensation committee, 

and to prescribe that the functions of 

that committee be performed by the 

NASDAQ OMX compensation 

committee or the full BX board, when 

required. The NASDAQ OMX By-Laws 

provide that its compensation 

committee considers and recommends 

compensation policies, programs, and 

practices for employees of NASDAQ 

OMX. According to BX, many 

employees performing work for BX are 

also employees of NASDAQ OMX, and 

certain senior officers of BX are also 

officers of NASDAQ OMX and other 

NASDAQ OMX subsidiaries because 

their responsibilities relate to multiple 

entities within the NASDAQ OMX 

corporate structure.13 As a result, 

NASDAQ OMX establishes 

compensation and compensation policy 

for these employees. 

To the extent that policies, programs, 

and practices must be established for 

any BX officers or employees who are 

not also NASDAQ OMX officers or 

employees, BX states that the BX Board 

will perform such actions without the 

use of a compensation committee, 

subject to recusal by Staff Directors,14

unless the persons in question are also 

employees of Boston Options Exchange 

Regulation LLC (‘‘BOXR’’).15

The Commission notes that the 

proposed elimination of the BX audit 

and management compensation 

committees is comparable to a structure 

for the NYSE that the Commission 

previously considered and approved.16

The Commission finds that the 

proposed elimination of the BX’s audit 

and management compensation 

committees is consistent with the 

Exchange Act. 

II. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,17 that the 

proposed rule change (SR–BX–2009– 

021) be, and it hereby is, approved. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.18

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–16450 Filed 7–10–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60196; File No. SR–DTC– 

2006–16] 

Self-Regulatory Organizations; The 

Depository Trust Company; Order 

Granting Approval of a Proposed Rule 

Change as Amended Relating to FAST 

and DRS Limited Participant 

Requirements for Transfer Agents 

June 30, 2009. 

I. Introduction 

On October 12, 2006, The Depository 

Trust Company (‘‘DTC’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’) proposed rule change 

SR–DTC–2006–16 pursuant to Section 

19(b)(1) of the Securities Exchange Act 

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Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 33497 

1 15 U.S.C. 78s(b)(1). 

2Securities Exchange Act Release No. 55816 (May 

25, 2007), 71 FR 30648 (June 1, 2007). 

3Securities Exchange Act Release No. 57362 

(February 20, 2008), 73 FR 10849 (February 28, 

2008). 

4Securities Exchange Act Release No. 57959 

(June 12, 2008), 73 FR 57959 (June 19, 2008). 

5 Infra note 22. The comment letters can be found 

at http://www.sec.gov/comments/sr-dtc-2006-16/ 

dtc200616shtml. 

6For a description of DTC’s current rules relating 

to FAST, refer to Securities Exchange Act Release 

Nos. 13342 (March 8, 1977) [File No. SR–DTC–76– 

3]; 14997 (July 26, 1978) [File No. SR–DTC–78–11]; 

21401 (October 16, 1984) [File No. SR–DTC–84–8]; 

31941 (March 3, 1993) [SR–DTC–92–15]; and 46956 

(December 6, 2002) [File No. SR–DTC–2002–15]. 

7 DTC introduced the FAST program in 1975 with 

400 issues and 10 agents. Currently, there are over 

930,000 issues and approximately 90 agents in 

FAST. 

8 DRS provides an investor with the ability to 

register her securities in her own name on the 

issuer’s records and to efficiently transfer by bookentry movements her securities positions to her 

broker-dealer rather than holding a physical 

certificate or holding indirectly through a financial 

intermediary (e.g., a broker-dealer) in ‘‘street 

name.’’ DRS also allows for the transfer of a DRS 

position from the books of the issuer to the account 

of a DTC broker-dealer participant and vice versa 

through the facilities of DTC using FAST. 

9Securities Exchange Act Release Nos. 54289 

(August 8, 2006), 71 FR 47278 (August 16, 2006) 

[File No. SR–NYSE–2006–29]; 54290 (August 8, 

2006), 71 FR 47262 (August 16, 2006) [File No. SR– 

Amex–2006–40]; 54288 (August 8, 2006), 71 FR 

47276 (August 16, 2006) [File No. SR–NASDAQ– 

2006–08]; 54410 (September 7, 2006), 71 FR 54316 

(September 14, 2006) [File No. SR–NYSE Arca– 

2006–31]; 55482 (March 15, 2007), 72 FR 13547 

(March 22, 2007) [File No. SR–Phlx–2006–69]; 

55481 (March 15, 2007), 72 FR 13546 (March 22, 

2007) [File No. SR–CHX–2006–33]; and 55480 

(March 15, 2007), 72 FR 13544 (March 22, 2007) 

[File No. SR–BSE–2006–46]. 

10For a description of DTC’s rules relating to 

DRS, see Securities Exchange Act Release Nos. 

37931 (November 7, 1996) [File No. SR–DTC–96– 

15]; 41862 (September 10, 1999) [File No. SR–DTC– 

99–16]; 42366 (January 28, 2000) [File No. SR– 

DTC–00–01]; 42704 (April 19, 2000) [File No. SR– 

DTC–00–04]; 43586 (November 17, 2000) [File No. 

SR–DTC–00–09]; 44969 (August 14, 2001) [File No. 

SR–DTC–2001–07]; 45232 (January 3, 2002) [SR– 

DTC–2001–18]; 45430 (February 11, 2002) [File No. 

SR–DTC–2002–01]; 48885 (December 5, 2003) [File 

No. SR–DTC–2002–17]; and 52422 (September 14, 

2005) [File No. SR–DTC–2005–11]. 

of 1934 (‘‘Act’’).1 On March 29, 2007, 

and May 3, 2007, DTC filed 

amendments to the proposed rule 

change. On May 25, 2007, the 

Commission published notice of the 

proposed rule change as amended by 

Amendment 1 and Amendment 2.2 On 

December 31, 2007, DTC again filed an 

amendment. Notice of the amended 

proposal was published in the Federal 

Register on February 20, 2007.3 On June 

23, 2008, DTC again filed an 

amendment. Notice of the amended 

proposed rule change was published in 

the Federal Register on June 19, 2008.4

The Commission received 47 comment 

letters in total to the proposed rule 

change.5 For the reasons discussed 

below, the Commission is granting 

approval of the proposed rule change, as 

amended. 

II. Description 

Prior to the establishment of DTC’s 

Fast Automated Securities Transfer 

program (‘‘FAST’’), transfers of 

securities to or from DTC on behalf of 

its participants occurred by sending 

securities certificates back and forth 

between DTC and transfer agents. In the 

case of securities being deposited with 

DTC, DTC sent the certificates received 

by its participants to the transfer agent 

for registration into the name of DTC’s 

nominee, Cede & Co., and the transfer 

agent returned the reregistered 

certificates to DTC. In the case of 

securities being withdrawn from DTC, 

DTC sent the certificates registered in 

the name of Cede & Co. to the transfer 

agent for reregistration into the name 

designated by the withdrawing 

participant, and the transfer agent 

returned a reregistered security 

certificate to DTC for delivery to the 

withdrawing participant or delivered 

the reregistered security certificate to 

another entity as directed and sent a 

security certificate to DTC representing 

the remainder of DTC’s position. The 

process of physically transporting 

securities certificates between DTC and 

transfer agents exposed DTC, its 

participants, and the transfer agents to 

the risk of loss during transit and 

resulted in significant expenses. 

DTC’s FAST program was designed to 

eliminate some of the risks and costs 

related to this production and 

transportation of securities certificates. 

Under the FAST program, transfer 

agents hold FAST eligible securities in 

the name of Cede & Co. for the benefit 

of DTC.6 As additional securities are 

deposited or withdrawn from DTC, 

transfer agents adjust the size of DTC’s 

position as appropriate and 

electronically confirm theses changes 

with DTC. Transfer agents acting as 

‘‘FAST agents’’ are holding in custody 

for DTC those securities that would 

otherwise be held at DTC. As such, the 

FAST program reduces the movement of 

certificates between DTC and the 

transfer agents and therefore reduces the 

costs and risks associated with the 

creation, movement, and storing of 

certificates for issuers, transfer agents, 

broker-dealers, and DTC. 

The FAST program has grown 

substantially since first being 

introduced in 1975.7 Recently all the 

major securities exchanges have made 

changes to the listing requirements to 

require companies to make their 

securities eligible to participate in the 

Direct Registration System (‘‘DRS’’).8

Because FAST eligibility is a 

prerequisite to an issue being eligible for 

DRS, DTC expects that the number of 

FAST eligible securities will continue to 

expand.9 Furthermore, because being a 

FAST agent is a criterion for a transfer 

agent’s eligibility for participation in 

DRS, DTC anticipates significant growth 

in the number of FAST agents.10

As a result of discussions with 

industry representatives, including 

transfer agents, broker-dealers, issuers, 

insurance companies, and various 

industry associations, DTC amended its 

filing four times in order to address 

concerns with the various proposals. 

The provisions contained in DTC’s 

proposed rule change, as amended by 

the four amendments, are the provisions 

discussed in this order. 

(1) Amendments to DTC’s FAST 

Requirements 

Despite the FAST program’s robust 

past growth and expected future growth, 

the transfer agent eligibility 

requirements for FAST have not 

substantially changed since the 

implementation of FAST in 1975 and do 

not: (i) Take into account the increased 

volume and value of securities 

processed by the transfer agents, (ii) 

reflect improved technology and 

currently available safeguards that could 

enhance the safekeeping of securities 

held by the transfer agents on behalf of 

DTC, and (iii) require the use of 

standardized audit reports addressing 

transfer agents’ processes and controls. 

In light of the FAST program’s 

growth, DTC re-examined the transfer 

agent eligibility requirements of the 

FAST program with a view toward 

ensuring that DTC’s assets in the 

custody of transfer agents, which 

ultimately belong to DTC’s participants 

and their customers, are adequately 

protected. As more fully described 

below, DTC has identified aspects of 

these FAST eligibility requirements that 

need revising or additional components. 

The revisions and additional 

requirements include: (i) Insurance 

requirements that take into account the 

level of transaction volumes of 

securities processed by transfer agents, 

(ii) safekeeping requirements to clarify 

and to enhance security and fire 

protection standards and to take into 

consideration technological advances 

that allow for economical security 

improvements, and (iii) bookkeeping 

requirements to ensure compliance with 

applicable laws and regulations and 

mstockstill on DSKH9S0YB1PROD with NOTICES

33498 Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 

11 DTC currently maintains three forms of the 

Balance Certificate Agreement: One for transfer 

agents, one for issuers acting as their own agent, 

and one for parties using a processing agent. DTC 

is consolidating these forms into a single form, as 

attached as Exhibit 2 to its initial filing. 

12 DTC notes that these minimum requirements 

incorporate by reference the Balance Certificate 

Agreement between the transfer agent and DTC. 

13The ‘‘Operational Criteria for the FAST 

Transfer Agent Processing’’ is attached as Exhibit 

2(b) to DTC’s initial filing. 

14For more information relating to DTC’s OA, 

refer to Securities Exchange Act Release Nos. 45994 

(May 29, 2002), 67 FR 39452 [File No. SR–DTC– 

2002–02]; 24818 (August 19, 1987), 52 FR 31833 

[File No. DTC–87–10]; 25948 (July 27, 1988), 53 FR 

29294 [File No. DTC–88–13]; 30625 (April 23, 

1992), 57 FR 18534 [File No. DTC–92–06]; 35649 

(April 26, 1995), 60 FR 21576 [File No. DTC–94– 

19]; and 39894 (April 21, 1998), 63 FR 23310 [File 

No. DTC–97–23]. 

15 DTC notes that these minimum requirements 

incorporate by reference the ‘‘Operational Criteria 

for FAST Transfer Agent Processing’’ and all 

applicable terms in DTC’s ‘‘Operational 

Arrangements.’’ 

16 DTC agrees to establish and maintain any and 

all such safeguards as are necessary and appropriate 

to protect the confidentiality of any notices, 

correspondences, or reports from the Commission 

to the transfer agent, and any follow-up 

correspondences, that the transfer agent provides to 

DTC. DTC also agrees that any information obtained 

from these notices, correspondences, or reports will 

not be used for any reason other than the intended 

purposes as authorized by this order and will not 

be shared with any person or entity outside of DTC. 

DTC will also notify the Commission if these 

documents are required to be remitted by DTC to 

any other federal or state authority. 

standardized audit reports addressing 

transfer agents’ processes and controls. 

DTC is therefore amending and 

restating the minimum requirements for 

transfer agents’ participation in the 

FAST program in order to improve the 

safekeeping of securities that transfer 

agents hold for DTC and to provide 

improved safekeeping requirements as 

more transfer agents participate in the 

immobilization and dematerialization of 

securities. DTC’s revised minimum 

requirements are as follows. 

1. The transfer agent must be 

registered with the Commission or its 

appropriate regulatory authority, except 

where the transfer agent’s participation 

in the FAST program is limited to acting 

solely for municipal issues or unlisted 

corporate debt issues (transfer agents 

must provide DTC with evidence of 

such limited use), and must follow all 

applicable rules under the Exchange Act 

and all other applicable Federal and 

State laws, rules, and regulations 

applicable to transfer agents, including 

OFAC regulations. 

2. The transfer agent must execute 

and fulfill the requirements of the 

appropriate form of ‘‘Balance Certificate 

Agreement’’ 11 with DTC.12

3. The transfer agent must sign and 

fulfill requirements of the ‘‘Operational 

Criteria for the FAST Transfer Agent 

Processing’’ 13 and must comply with all 

applicable provisions of DTC’s 

‘‘Operational Arrangements’’ (‘‘OA’’),14

as amended from time to time.15

4. In order to provide for the 

operational proficiency and efficiency of 

the program, the transfer agent must 

complete DTC’s training on FAST 

functionality on being accepted as a 

FAST transfer agent. 

5. In order to protect against the risk 

of loss, the transfer agent must carry and 

provide evidence to DTC of a minimum 

of the following standard form Financial 

Institution Bond or a commercial crime 

policy providing similar coverage in 

proportion to transaction volume the 

agent processes, as follows: 

a. $10 million for a transfer agent with 

25,000 or fewer transfer transactions per 

year as reported to the Commission; 

b. $25 million for a transfer agent with 

over 25,000 transfer transactions per 

year as reported to the Commission; and 

c. In addition, the transfer agent must 

carry and provide evidence to DTC of a 

minimum of $1 million in Errors and 

Omissions insurance. 

In the event that a transfer agent can 

demonstrate to DTC that its existing 

coverage and/or capitalization would 

provide similar protections to DTC as 

the requirements set forth above, it may 

apply to DTC for a waiver. DTC shall 

have sole discretion as to whether or not 

to grant any such waiver. 

6. In order to facilitate consistent 

protection against losses relating to 

securities in the transfer agent’s control, 

the transfer agent must notify DTC as 

soon as practicable of notice of any 

actual lapse in insurance coverage or 

change in business practices, such as 

increasing volumes or other business 

changes, that would result in the 

transfer agent requiring additional 

insurance coverage as outlined above. 

Such notice shall be delivered to: 

DTC, Inventory Management—1SL, 55 

Water Street, New York, New York 

10041. 

A copy of such notice shall also be 

delivered to: 

DTC, General Counsel’s Office, 55 Water 

Street—22nd Floor, New York, New 

York 10041. 

7. The transfer agent must provide 

proof to DTC of any new or substitute 

policy with respect to any required 

insurance within five (5) days after the 

entry into force of such new or 

substitute policy. 

8. The transfer agent must establish 

and maintain electronic 

communications with DTC that enable 

FAST positions to be balanced on a 

daily schedule. 

9. The transfer agent must provide to 

DTC on an annual basis within ten (10) 

business days of filing with the 

Commission, a copy of the Annual 

Study of Evaluation of Internal 

Accounting Control filed with the 

Commission pursuant to Exchange Act 

Rule 17Ad–13. If a transfer agent obtains 

a SAS–70 audit report, the transfer agent 

shall provide DTC with a copy of the 

report within ten (10) business days of 

the transfer agent’s receipt of the report. 

10. FAST agents must safeguard all 

the securities assets as required by 

Exchange Act Rule 17Ad–12 and with at 

a minimum the following additional 

DTC requirements: 

a. Maintenance of a theft and fire 

central monitoring alarm system 

protecting the entire premises and 

b. Maintenance of all certificates in a 

vault, safe, or other secure location, 

which is accessible only by authorized 

personnel. 

11. Personnel with access to the vault, 

safe, or other secure location and the 

codes for the centralized monitoring 

system must comply with Exchange Act 

Rule 17f–2, which includes but is not 

limited to rules for fingerprinting staff 

that physically handle certificates. 

12. Unless prohibited by applicable 

law, the transfer agent when applying to 

be a FAST agent must provide DTC with 

a copy of the two most recent 

compliance or deficiency 

correspondences from the Commission 

as well as any follow-up 

correspondences. In addition, unless 

prohibited by applicable law, the 

transfer agent on an ongoing basis must 

provide DTC with notice of any alleged 

material deficiencies documented by the 

Commission that may affect the 

activities of the transfer agent as a FAST 

Agent within five (5) business days of 

the transfer agent being notified of such 

deficiencies.16

13. Unless prohibited by applicable 

law, during regular business hours and 

upon advance notice, DTC reserves the 

right to visit and inspect, to the extent 

such visits and inspections pertain to 

DTC’s securities position, the transfer 

agent’s facilities, books, and records. 

DTC, however, is not obligated to 

conduct such visits or inspections. 

14. Existing FAST agents shall have a 

period of six (6) months from the date 

of the Commission’s approval of this 

rule filing to comply with these 

requirements, including the submission 

to DTC of a signed Balance Certificate 

Agreement, signed Operational Criteria, 

and all supporting documentation 

referenced herein. If an agent is not 

compliant with these requirements 

upon the expiration of such period, DTC 

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Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 33499 

17 DRS Limited Participants are transfer agents 

that participate in DRS through DTC. They are 

bound to certain provisions of the DTC rules. 

Securities Exchange Act Release No. 37931 

(November 7, 1996) [File No. SR–DTC–96–15]. 

18 In DRS, instructions to transfer shares are sent 

by a broker-dealer that is a DTC participant or by 

a transfer agent that is a DRS Limited Participant 

through Profile. Profile provides screen based 

indemnification against false instructions from the 

party submitting the instructions through DRS. The 

indemnity is supported by either a surety bond or 

an insurance policy. 

19An issue may not become a DRS issue if an 

‘‘out of balance’’ position exists. An ‘‘out of 

balance’’ position occurs when DTC’s records 

indicating Cede & Co.’s ownership position do not 

match the transfer agent’s records indicating Cede 

& Co.’s ownership position. 

20Securities Exchange Act Release Nos. 20221 

(September 23, 1983) and 22940 (February 24, 

1986). In this regard, DTC adopted a uniform 

standard with respect to certain of its procedures, 

or Service Guides, such that DTC is not liable for 

any loss incurred by a participant other than one 

caused directly by gross negligence or willful 

misconduct on the part of DTC. See Securities 

Exchange Act Release No. 44719 (August 17, 2001) 

[File No. SR–DTC–2001–01]. 

21Securities Exchange Act Release No. 22940 

(February 24, 1986), 51 FR 7169 (order approving 

a rule change to establish a comprehensive standard 

of care and limitation of liability to its members). 

22This order only addresses specific comments 

that relate to provisions in DTC’s proposed rule 

change as the proposed rule change is being 

approved. It does not address comments on 

provisions that were either modified or deleted in 

response to comments. 

23Letters from Loren K. Hanson, Assistant 

Secretary, Otter Tail Corporation (June 5, 2007); 

Steven D. Lucas, Director of Transfer Agent 

Compliance, Investors Bank & Trust Company (June 

15, 2007); Walter E. Grote, Senior Vice President, 

Travelers Bond & Financial Products (June 19, 

2007); The Surety & Fidelity Association of America 

(June 19, 2007); Thomas L. Montrone, President and 

Chief Executive Officer, Registrar and Transfer 

Company (June 19, 2007); Salli Marinov, President 

and Chief Executive Officer, First American Stock 

Transfer Company (June 20, 2007); Steve Nelson, 

President and Chairman of the Board, Continental 

Stock Transfer & Trust Company (June 20, 2007); 

Dennis Callahan, Chairman, Bank Depository User 

Group (June 21, 2007); Kevin Kopaunik, Fidelity 

Transfer Company (June 21, 2007); Jonathan Miller, 

President StockTrans, Inc. (June 21, 2008); Artie 

Retolatto, 1st Global Stock Transfer, LLC (June 21, 

2007); James R. Alden, President, Shareholder 

Services Association (June 22, 2007); James Becker, 

Zions First National Bank (June 22, 2007); J. Donald 

Boggus, Jr., President and Chief Executive Officer, 

Crescent Banking Company and Crescent Bank and 

Trust Company (June 22, 2007); Albert Howell, 

Chairman, Regulatory and Clearance Committee, 

SIFMA Securities Operations Division, (June 22, 

2007); Lennie M. Kaufman, Executive Vice 

President, Wells Fargo Shareowner Services (June 

22, 2007); Lawrence Morillo, Chairman, Legal and 

Regulatory Subcommittee, SIFMA Operations 

Committee (June 22, 2007); J. Robert Morris, 

Managing Director, Valiant Trust Company (June 

22, 2007); Cristeena G. Naser, Senior Counsel, 

Center for Securities, Trust & Investments, 

American Bankers Association (June 22, 2007); 

James R. Nielsen, Senior Vice President, U.S. Bank 

National Association (June 22, 2007); Charles V. 

Rossi, President, The Securities Transfer 

Association, Inc. (June 22, 2007); Steven 

Rothbloom, President and Chief Executive Officer, 

Computershare North America (June 22, 2007); 

Continued 

shall have the right, using its sole 

discretion, to terminate or to continue 

the transfer agent’s status as a FAST 

agent. 

15. An agent acting on behalf of a 

transfer agent shall have the same rights 

and responsibilities under these 

requirements as if it were the transfer 

agent. 

(2) Amended and Restated Eligibility 

Requirements for DRS Limited 

Participants 

DTC is revising the eligibility 

requirements for DRS Limited 

Participants 17 and the eligibility 

requirements for DRS issues to promote 

consistency with the FAST program 

requirements as well as to further 

ensure the soundness of the DRS 

system. 

In order to be eligible to be a DRS 

Limited Participant, a transfer agent 

must: 

1. Participate in the FAST program 

and abide by DTC’s requirements 

governing participation in the FAST 

program; 

2. Execute a DTC Limited Participant 

Account agreement; 

3. Deliver transaction advices directly 

to investors relating to DRS Withdrawalby-Transfer requests and provide DTC 

with a file containing the information 

required by DTC (which must include, 

among other things, the transaction 

delivery date) in a format and using the 

functionality as specified by DTC from 

time to time; 

4. Complete DTC’s training program 

on DRS and Profile Modification System 

(‘‘Profile’’) functionality; 

5. Participate in the Profile surety or 

insurance program; 18

6. Implement program changes related 

to DTC internal systems modifications 

within a reasonable time upon receiving 

notification from DTC of such 

modifications; and 

7. Implement program changes to 

support and expand DRS processing 

capabilities as agreed to by the DRS Ad 

Hoc Committee. 

Existing DRS Limited Participants 

shall have a period of six (6) months 

from the date of the Commission’s 

approval of this rule filing within which 

they must comply with these 

requirements. If an agent is not 

compliant with these requirements 

upon the expiration of such period, DTC 

shall have the right using its sole 

discretion to terminate or to continue 

the agent’s status as a DRS Limited 

Participant. 

(3) Eligibility Requirements for DRS 

Issues 

In order for an issue to be eligible as 

a DRS issue, the issue must: 

1. Have a transfer agent accepted as a 

DTC DRS Limited Participant and 

2. Be included in the FAST 

program.19

(4) DTC’s Proposed Standard of Care 

Obligations With Respect to FAST 

DTC is also clarifying the 

responsibilities and liabilities of FAST 

agents with respect to their participation 

in the FAST program. DTC believes that 

historically the Commission has left to 

user-governed clearing agencies the 

question of how to allocate losses 

associated with, among other things, 

clearing agency functions.20 In 

conjunction with its approval of DTC’s 

rule filing whereby DTC adopted a 

uniform standard of responsibility with 

respect to certain of its services, the 

Commission noted that while it had 

‘‘called on registered clearing agencies 

to undertake, by rule, to deliver all fully 

paid securities in their control to, or as 

directed by, the participant for whom 

the securities are held,’’ in light of the 

fact that registered clearing agencies had 

demonstrated a high level of 

responsibility in safeguarding securities 

and funds, the Commission did not find 

that a standard of care based on a strict 

standard of liability was required either 

with respect to failures of the clearing 

agency or a sub-custodian.21

DTC notes that securities in the FAST 

program are held by a transfer agent and 

are not within the immediate custody 

and control of DTC. As such, DTC is 

adding a clarifying provision to DTC’s 

Rule 6, a rule pertaining to DTC’s 

standard of care as it applies to DTC 

participants, to make clear that DTC will 

not be liable to participants for the acts 

or omissions of FAST Agents or other 

third parties (including, but not limited 

to, any depository, custodian, subcustodian, clearing or settlement 

system, transfer agent, registrar, data 

communication service or delivery 

service) unless a loss is caused directly 

by DTC’s gross negligence, willful 

misconduct, or violation of federal 

securities laws for which there is a 

private right of action. In addition, DTC 

is making it clear that under no 

circumstance shall DTC be liable for the 

selection or acceptance of any third 

party as an agent of DTC, including a 

transfer agent participating in the FAST 

Program. 

III. Comment Letters 22

The Commission received a total of 47 

comment letters on DTC’s initial 

proposal and the subsequent four 

amendments (published in three notices 

for comment).23 Specifically, the 

mstockstill on DSKH9S0YB1PROD with NOTICES

33500 Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 

William Speirs, President, Securities Transfer 

Association of Canada (June 26, 2007); Susanne 

Trimbath, PhD, Chief Executive Officer and Chief 

Economist, STP Advisory Services, LLC (June 26, 

2007); Thomas M. Sullivan, Chief Counsel for 

Advocacy, and Charles A. Maresca, Director, 

Interagency Affairs, U.S. Small Business 

Administration (June 27, 2007); Gary N. Nazare, 

Managing Director, Transfer Agency Services, The 

Bank of New York (June 29, 2007), Charles Douglas 

Bethill, Thacher, Proffitt & Wood LLP (December 

28, 2007), Charles V. Rossi, President, Securities 

Transfer Association, Inc. (March 17, 2008); 

William Speirs, President, Securities Transfer 

Association of Canada (March 18, 2008); Steven G. 

Nelson, Chairman of the Board and President, 

Continental Stock Transfer & Trust Company 

(March 19, 2008); Martin J. McHale Jr., President, 

US Equity Services, Computershare (March 20, 

2008); Loren Hanson, Assistant Secretary, Otter Tail 

Corporation (March 20, 2008); Kevin B. Halter, Jr., 

President, Securities Transfer Corporation (March 

20, 2008); Mary C. Fernandez, Standard Registrar 

and Transfer Agency, Inc. (March 20, 2008); and 

Cristeena G. Naser, Senior Counsel, Center for 

Securities, Trust & Investments, American Bankers 

Association (March 20, 2008). 

24Letters from Loren K. Hanson, Assistant 

Secretary, Otter Tail Corporation (June 5, 2007); 

Steven D. Lucas, Director of Transfer Agent 

Compliance, Investors Bank & Trust Company (June 

15, 2007); Walter E. Grote, Senior Vice President, 

Travelers Bond & Financial Products (June 19, 

2007); The Surety & Fidelity Association of America 

(June 19, 2007); Thomas L. Montrone, President and 

Chief Executive Officer, Registrar and Transfer 

Company (June 19, 2007); Salli Marinov, President 

and Chief Executive Officer, First American Stock 

Transfer Company (June 20, 2007); Steve Nelson, 

President and Chairman of the Board, Continental 

Stock Transfer & Trust Company (June 20, 2007); 

Dennis Callahan, Chairman, Bank Depository User 

Group (June 21, 2007); Kevin Kopaunik, Fidelity 

Transfer Company (June 21, 2007); Jonathan Miller, 

President StockTrans, Inc. (June 21, 2008); Artie 

Retolatto, 1st Global Stock Transfer, LLC (June 21, 

2007); James R. Alden, President, Shareholder 

Services Association (June 22, 2007); James Becker, 

Zions First National Bank (June 22, 2007); J. Donald 

Boggus, Jr., President and Chief Executive Officer, 

Crescent Banking Company and Crescent Bank and 

Trust Company (June 22, 2007); Albert Howell, 

Chairman, Regulatory and Clearance Committee, 

SIFMA Securities Operations Division, (June 22, 

2007); Lennie M. Kaufman, Executive Vice 

President, Wells Fargo Shareowner Services (June 

22, 2007); Lawrence Morillo, Chairman, Legal and 

Regulatory Subcommittee, SIFMA Operations 

Committee (June 22, 2007); J. Robert Morris, 

Managing Director, Valiant Trust Company (June 

22, 2007); Cristeena G. Naser, Senior Counsel, 

Center for Securities, Trust & Investments, 

American Bankers Association (June 22, 2007); 

James R. Nielsen, Senior Vice President, U.S. Bank 

National Association (June 22, 2007); Charles V. 

Rossi, President, The Securities Transfer 

Association, Inc. (June 22, 2007); Steven 

Rothbloom, President and Chief Executive Officer, 

Computershare North America (June 22, 2007); 

William Speirs, President, Securities Transfer 

Association of Canada (June 26, 2007); Susanne 

Trimbath, PhD, Chief Executive Officer and Chief 

Economist, STP Advisory Services, LLC (June 26, 

2007); Thomas M. Sullivan, Chief Counsel for 

Advocacy, and Charles A. Maresca, Director, 

Interagency Affairs, U.S. Small Business 

Administration (June 27, 2007); Gary N. Nazare, 

Managing Director, Transfer Agency Services, The 

Bank of New York (June 29, 2007); and Charles 

Douglas Bethill, Thacher, Proffitt & Wood LLP 

(December 28, 2007). 

25Letters from Charles V. Rossi, President, 

Securities Transfer Association, Inc. (March 17, 

2008); William Speirs, President, Securities 

Transfer Association of Canada (March 18, 2008); 

Steven G. Nelson, Chairman of the Board and 

President, Continental Stock Transfer & Trust 

Company (March 19, 2008); Martin J. McHale Jr., 

President, US Equity Services, Computershare 

(March 20, 2008); Loren Hanson, Assistant 

Secretary, Otter Tail Corporation (March 20, 2008); 

Kevin B. Halter, Jr., President, Securities Transfer 

Corporation (March 20, 2008); Mary C. Fernandez, 

Standard Registrar and Transfer Agency, Inc. 

(March 20, 2008); and Cristeena G. Naser, Senior 

Counsel, Center for Securities, Trust & Investments, 

American Bankers Association (March 20, 2008). 

26Letter from Ray Dunn, Director of Shareholder 

Services, The Southern Company (March 20, 2008). 

27Letter from Charles Douglas Bethill, Thacher 

Proffitt & Wood, LLP (on behalf of DTC) (April 10, 

2008). 

28Letters from Martin J. McHale, President, U.S. 

Equity Services, Computershare (July 2, 2008); 

Loren Hanson, Assistant Secretary, Otter Tail 

Corporation (July 7, 2008); Charles V. Rossi, 

President, The Securities Transfer Association, Inc. 

(July 9, 2008); Kevin Kopaunik, Fidelity Transfer 

Company (July 10, 2008); Dorothy Miller, Vice 

President & Trust Officer, Hancock Bank (July 10, 

2008); Stephen G. Nelson, President and Chairman 

of the Board, Continental Stock Transfer & Trust 

Company (July 10, 2008); William Speirs, President, 

Securities Transfer Association of Canada (July 11, 

2008); Barbara J. Trivedi, Shareholder Services 

Manager, Crescent Banking Company, Crescent 

Bank and Trust Company (July 10, 2008); Edward 

L. Pittman, Thelen Reid Brown Raysman & Steiner 

LLP (July 15, 2008); John Petrofsky, Associate 

Counsel, DTC (July 30, 2008). 

Commission received twenty-seven 

comment letters on DTC’s original 

proposed rule change, as amended by 

Amendments 1 and 2.24 Twenty-three of 

the commenters opposed some or all of 

the provisions in the proposed rule 

change while three commenters 

supported the proposed rule change. 

DTC also submitted a comment letter 

addressing the concerns and issues 

raised by the opposing commenters. 

In response to commenters’ concerns 

raised by the first two amendments to 

DTC’s proposed rule change, DTC 

amended its filing for a third time. The 

Commission received ten comment 

letters to the third amendment, with 

eight commenters continuing to oppose 

the filing 25 and one commenter 

requesting clarification as to the 

application of one of the requirements 

of the proposed rule change to issuer 

transfer agents.26 In response to the 

concerns raised by these nine 

commenters, DTC submitted a comment 

letter.27 The comments set forth by 

those opposing the proposed rule 

change were for the most part the same 

concerns as were expressed in the 

comment letters submitted in response 

to the first notice of the first proposed 

rule change as amended by 

Amendments 1 and 2. 

After approximately one and a half 

years of negotiations between DTC and 

the transfer agent community, DTC 

amended the proposed rule change for 

a fourth and final time. The Commission 

received ten comment letters in 

response to the proposed rule change as 

modified by Amendment 4, with nine 

commenters opposing some or all of the 

proposed rule and DTC again submitting 

a comment letter addressing the 

commenter concerns.28 Seven of the 

nine commenters opposing the 

proposed rule change expressed their 

concerns in response to one or both of 

the prior published notices. None of the 

commenters opposing the proposed rule 

change, as amended by the fourth 

amendment, raised any issues that had 

not been raised in their prior comment 

letters. 

The majority of the nine commenters 

that opposed DTC’s proposed rule 

change, which were issuers, transfer 

agents, or industry associations 

representing issuers or transfer agents, 

an insurance company, an association 

representing insurance companies, the 

American Banking Association 

(‘‘ABA’’), the Office of Advocacy of the 

Small Business Administration 

(‘‘SBA’’), and one individual, opposed 

the proposed rule change for various 

reasons. Most of the commenters raised 

a number of general policy concerns 

such as: (1) DTC lacks the authority to 

impose rules on transfer agents, and the 

imposition of such rules is 

inappropriate given the commercial 

relationship between transfer agents and 

DTC; (2) the specific requirements are 

unduly burdensome, unnecessary, 

costly (particularly with respect to small 

transfer agents), and without sufficient 

justification; (3) the proposed rule 

change appears based on the premise 

that transfer agents act as custodian for 

DTC’s securities as recorded on the 

records of the issuer—a premise that the 

transfer agents and banks reject as 

erroneous; and (4) many of the 

provisions proposed by DTC are 

inconsistent with the movement to a 

book-entry form of securities ownership. 

The remaining commenters, which 

were predominantly industry 

associations representing broker-dealers, 

supported the proposed rule change 

because of their belief that DTC’s 

proposed requirements are necessary to 

facilitate the continuing increase in the 

use of DRS, which they contend is 

necessary in order to achieve the 

industry’s objective of decreasing or 

eliminating the use of securities 

certificates in the U.S. market, and to 

reduce the risks associated with the 

continuing increase in volume and 

value of DRS transactions. 

The following describes commenters’ 

concerns with the specific provisions 

remaining in DTC’s proposed rule 

mstockstill on DSKH9S0YB1PROD with NOTICES

Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 33501 

29 15 U.S.C 78q–1(a)(3). 

30Letter from the Securities Transfer Association 

(‘‘STA’’). 

change in its final form after all 

amendments. 

Jurisdiction. Many of the commenters 

who are transfer agents or organizations 

representing transfer agents oppose the 

proposed rule change because they 

contend that the Commission and 

banking regulators are statutorily 

charged with the responsibility of 

regulating transfer agents, and DTC is 

not. They further argue that even though 

the transfer agents are ‘‘limited 

participants’’ of DTC with respect to 

their participation in DRS, transfer 

agents do not have the full procedural 

safeguards that statutorily exist for DTC 

participants pursuant to Section 17A of 

the Exchange Act.29 The transfer agents 

are also concerned that the rule change 

gives DTC ‘‘unfettered’’ discretion to 

decide which transfer agents are eligible 

to participate in DRS, to impose 

significant requirements to change 

transfer agent systems and operations, 

and to terminate transfer agents as FAST 

agents and limited participants at DTC’s 

discretion. 

Insurance Requirements. Almost all of 

those opposed to DTC’s rule filing 

objected to some or all of DTC’s 

proposed insurance requirements as 

being too costly and too onerous, 

particularly the ‘‘excessively’’ high 

minimum coverage levels, ‘‘excessively’’ 

low deductibles, and opposed the 

requirement of notifying DTC of changes 

in their insurance policies. The STA 

and several other commenters stated 

that they believe DTC and other 

registered holders have sustained 

virtually no economic losses as a result 

of under-insured transfer agent activity, 

thereby making the proposed insurance 

requirements unnecessary, overly broad, 

and without justification. 

Many of the commenters that oppose 

the rule change contend that for some 

smaller transfer agents, the amounts of 

proposed minimum insurance coverage 

would exceed the value of DTC’s 

securities held by the transfer agent and 

therefore are not reasonable. One 

commenter representing a large number 

of commercial bank and non-bank 

transfer agents noted that it believes that 

none of its members currently meet the 

insurance and deductible 

requirements.30 In addition, this 

commenter along with the ABA and 

several other transfer agents opposed 

the requirement for transfer agents to (1) 

notify DTC at least 30 days prior to any 

expiration or change in insurance limits 

as unrealistic due to the manner in 

which policies are renewed, and (2) 

notify DTC within five days of any 

notice of threatened or actual lapse in 

coverage as an unreasonable burden on 

insurance carriers. 

Safekeeping Requirements. Most 

transfer agents that opposed the 

amended proposed rule change took 

issue with DTC dictating specific 

physical security standards with respect 

to transfer agents’ safeguarding 

obligations. Many of these commenters 

suggested that the Commission’s 

safekeeping rule, Rule 17Ad–12, is 

sufficient to govern transfer agent 

safeguarding obligations. 

DTC maintains that specific physical 

security standards are justified in light 

of transfer agents holding blank 

securities certificates, which can and 

have been fraudulently issued or 

endorsed. 

Audit Requirements. Almost all the 

commenters opposing the proposed rule 

change objected to some or all of DTC’s 

proposed audit requirements. Most of 

the transfer agents and industry 

associations representing issuers and 

agents argued that requiring submission 

to DTC of a SAS 70 or SSAE–19 report 

certifying compliance with DTC 

requirements and Commission rules and 

requiring attesting to the soundness of 

the transfer agent’s controls is 

superfluous, unwarranted, and costly, 

especially in light of the requirement 

that an audit report be filed with the 

Commission by registered transfer 

agents pursuant to Exchange Act Rule 

17Ad–13. The transfer agents contended 

that the existing Commission 

regulations should be sufficient to 

satisfy DTC’s concerns. 

One issuer acting as its own transfer 

agent stated its belief that DTC rules 

have been developed to address large 

commercial transfer agent operations 

without taking into consideration other 

types of transfer agents. This commenter 

noted that pursuant to an exemption 

provided to small transfer agents under 

Commission Rule 17Ad–4, it is 

exempted from the Commission’s audit 

requirements. This commenter stated 

that small transfer agents pose 

significantly less risk to the public than 

large commercial transfer agents, 

thereby providing the basis for the 

Commission’s exemption. This 

comment also argued that as a publicly 

traded company, it has audit 

requirements, including internal 

controls that are audited internally and 

externally pursuant to federal 

regulation. Compliance with DTC’s 

rules, this transfer agent estimated, 

would cost in excess of $10,000 per year 

for the audit when it conducts less than 

1,000 transfers per year. 

Shareholder Statements. Many 

transfer agents objected to DTC 

requiring that for DRS withdrawal-bytransfers, DRS Limited Participants send 

a transaction advice to shareholders by 

mail and to DTC by electronic file. 

While the concept of sending such 

statements was not objectionable to 

most of the transfer agents opposing this 

requirement, the STA maintains that 

DTC has no authority to mandate 

notifications to shareholders holding 

positions in DRS. 

Notice of Regulatory Action and Onsite Inspection by DTC. The STA and a 

number of transfer agents opposed the 

requirement to provide DTC with copies 

of Commission examination reports 

within five business days of ‘‘any 

alleged material deficiencies.’’ The 

transfer agents contend they do not 

provide this information to any other 

registered securityholder, DTC has 

failed to demonstrate a need for such 

information, and DTC is not entitled to 

this confidential information under 

applicable law or regulation. They also 

objected to the requirement that transfer 

agents allow DTC access to their 

premises for on-site inspections. 

System Modifications and Enhanced 

DRS Processing Capabilities. The STA 

and a number of transfer agents objected 

to DTC requiring transfer agents to 

implement program changes and system 

modifications to support and expand 

DRS processing capabilities. The 

transfer agents contend that such a 

requirement fails to address the 

reasonableness and necessity of any 

changes and fails to address the costs 

that may be incurred by transfer agents. 

Transfer agents objected to DTC 

unilaterally determining what changes 

to make to FAST and DRS without 

agreement from the transfer agents. 

They also objected to the use of the DRS 

Ad Hoc Committee as the ultimate 

arbiter of disputes because they believe 

the Committee is dominated by DTC 

and its participants and because the 

Committee has no governing by-laws or 

rules. 

Compensation. The STA objected as 

commercially unreasonable that transfer 

agents provide DRS and FAST services 

to DTC without compensation. It argued 

that transfer agents should be entitled to 

refuse to provide DTC services if DTC 

refuses to pay for services rendered 

without the threat that DTC could throw 

them out of FAST and DRS. 

Standard of Care. Transfer agents 

opposed DTC’s standard of care 

provision because they believe that it 

would permit DTC to avoid 

responsibility for its own errors and 

would force transfer agents to be 

responsible if a third party (i.e., brokermstockstill on DSKH9S0YB1PROD with NOTICES

33502 Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 

31The Commission notes that the Regulatory 

Flexibility Act of 1980 is not applicable to proposed 

rule changes filed by self-regulatory organizations 

pursuant to Section 19(b) of the Exchange Act. 

32 15 U.S.C. 78q–1(b)(3)(F). 

33 15 U.S.C. 78q–1(a)(1)(A). 

34 15 U.S.C. 78q–1(a)(1)(B). 

35Exchange Act Release No. 20221 (September 

23, 1983), 48 FR 45167 (October 3, 1983). 

36The use of certificates often results in 

significant delays and expenses in processing 

securities transactions and raises safety concerns 

associated with lost, stolen, and counterfeit 

certificates. The concerns associated with lost 

certificates were dramatically demonstrated during 

the September 11, 2001, tragedy when tens of 

thousand of certificates maintained in brokerdealers’ vaults either were destroyed or were 

unavailable for transfer. See Securities Exchange 

Act Release No. 49405 (March 11, 2004), 69 FR 

12922 (March 18, 2004) [File No. S7–13–04] 

(Securities Transaction Settlement Concept 

Release). 

37Securities Exchange Act Release No. 32455 

(June 11, 1993), 58 FR 33679 (June 18, 1993) (order 

approving rules requiring members, member 

organizations, and affiliated members of the New 

York Stock Exchange, National Association of 

Securities Dealers, American Stock Exchange, 

Midwest Stock Exchange, Boston Stock Exchange, 

Pacific Stock Exchange, and Philadelphia Stock 

Exchange to use the facilities of a securities 

depository for the book-entry settlement of all 

transactions in depository-eligible securities with 

another financial intermediary). 

38Securities Exchange Act Release No. 35798 

(June 1, 1995), 60 FR 30909 (June 12, 1995) (order 

approving rules setting forth depository eligibility 

requirements for issuers seeking to have their shares 

listed on the exchange). 

39Securities Exchange Act Release Nos. 13342 

(March 8, 1977) [File No. SR–DTC–76–3]; 14997 

(July 26, 1978) [File No. SR–DTC–78–11]; 21401 

(October 16, 1984) [File No. SR–DTC–84–8]; 31941 

(March 3, 1993) [SR–DTC–92–15]; and 46956 

(December 6, 2002) [File No. SR–DTC–2002–15]. 40See supra note 10. 

dealer or registered shareholder) were to 

suffer a loss caused by an error at DTC 

with regard to transactions or transfers 

involving transfer agents. They contend 

that the exculpatory language would 

force injured parties to seek recovery 

from the transfer agent even in the event 

the transfer agent were not at fault 

instead of each party bearing 

responsibility for its own processing 

errors. The transfer agents state that a 

unilateral waiver would not be in 

accordance with standard industry 

practice or public policy. 

Regulatory Flexibility Act of 1980. 

The transfer agents contend that no 

evidence of any assessment has been 

done by DTC to examine the economic 

impact on small transfer agents or small 

issuers to ensure compliance with the 

requirements of the Regulatory 

Flexibility Act of 1980.31

IV. Discussion 

Section 17A(b)(3)(F) 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, 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, to foster 

cooperation and coordination with 

persons engaged in the clearance and 

settlement of securities transactions, 

and to remove impediments to and 

perfect the mechanism of a national 

system for the prompt and accurate 

clearance and settlement of securities 

transactions, and in general, to protect 

investors and the public interest.32 For 

the reasons described below, the 

Commission finds that the rule change 

as amended is consistent with these 

provisions of Section 17A. 

In Section 17A of the Act, Congress 

set forth its finding that the prompt and 

accurate clearance and settlement of 

securities transactions, including the 

transfer of record ownership and 

safeguarding of securities and funds 

related to clearance and settlement 

activities, is necessary for the protection 

of investors and those acting on behalf 

of investors.33 Inefficient clearance and 

settlement procedures, Congress found, 

impose unnecessary costs on investors 

and those acting on their behalf.34 The 

Commission’s approval of DTC’s 

registration as a clearing agency 

constituted an important step in its 

efforts to facilitate the development of a 

national clearance and settlement 

system and a significant step in 

achieving the goals established by 

Congress.35

Consistent with this directive, the 

Commission has encouraged the 

immobilization and the 

dematerialization of securities holdings 

by supporting the use of alternatives to 

holding securities in certificated form in 

an effort to improve efficiencies and 

decrease risks associated with 

processing securities certificates.36

Among other things, the Commission 

has approved the rule filings of selfregulatory organizations that require 

their members to use the facilities of a 

securities depository for the book-entry 

settlement of all transactions in 

depository-eligible securities 37 and 

require that before any security can be 

listed for trading, it must have been 

made depository eligible if possible.38

The Commission has also approved a 

number of rule filings relating to DTC’s 

FAST program, which has facilitated 

significantly more efficient processing 

of transfers by eliminating the physical 

delivery of securities certificates 

between transfer agents and DTC.39

More recently the Commission has 

approved the implementation and 

expansion of DRS by approving DTC’s 

rules relating to the administration of 

DRS facilities used by transfer agents 

and broker-dealers.40

DTC’s FAST program authorizes 

transfer agents to hold securities on 

behalf of DTC in order to avoid having 

multiple physical certificates sent 

between transfer agents and DTC 

because of DTC’s ever-changing 

ownership positions. Eliminating the 

need to transfer a physical certificate 

every time DTC’s ownership position 

changes reduces risk and costs of 

processing transfers, which is a benefit 

to not only DTC, transfer agents, and 

issuers but also to the millions of 

beneficial owners of the securities 

holding in street name at DTC. 

Because of the critical role the FAST 

and DRS programs play in the clearance 

and settlement of transactions in 

securities, which are legally owned by 

DTC and beneficially owned by DTC 

participants and their customers, the 

Commission believes that DTC has a 

legitimate interest in making sure that 

FAST agents and DRS Limited 

Participants comply with reasonable 

and appropriate requirements for 

participation in these programs in order 

that DTC can fulfill its statutory 

obligation to safeguard securities and 

funds that are in its custody or control 

or for which it is responsible. In 

response to the comments submitted in 

response to the proposed rule changes, 

DTC amended its proposal four times in 

an effort to reduce the cost and 

operational burden on transfer agents 

while still maintaining the appropriate 

level of safeguards necessary for DTC to 

comply with its statutory obligations. 

The Commission believes that the 

requirements, as amended, are fair and 

reasonable in light of the vital function 

the FAST and DRS programs play in the 

national clearance and settlement 

system and should help further 

improvements in the interactions 

between transfer agents and DTC, which 

is an essential component of improving 

the industry’s dematerialization efforts. 

In adopting these new rules, the 

Commission does not believe that DTC 

is attempting to ‘‘regulate’’ transfer 

agents as some commenters contended. 

Rather, the Commission believes that 

DTC is imposing reasonable obligations 

necessary for it to comply with its 

statutory obligations and only on those 

transfer agents that choose to participate 

in its FAST and DRS programs. Further, 

as a self-regulatory organization, DTC is 

required to file rule changes affecting 

the FAST or DRS program, and by 

extension, those transfer agents 

participating in these programs, with 

the Commission pursuant to Section 

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Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices 33503 

41 In approving the proposed rule change, the 

Commission considered the proposal’s impact on 

efficiency, competition, and capital formation. 15 

U.S.C. 78c(f). 

42 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

19(b) of the Exchange Act. Most of these 

filings have been and will continue to 

be filed with the Commission, 

published for public comment, and 

subject to the review and approval by 

the Commission. This process should 

provide transfer agents, as well as others 

affected by DTC’s rules, adequate 

procedural safeguards. 

Some commenters contend that by 

allowing DTC the authority to determine 

which transfer agents may become a 

FAST transfer agent or DRS Limited 

Participant, DTC is also granted by 

extension the authority to determine 

which transfer agents may continue to 

operate a transfer agent business. The 

Commission does not agree. Many 

transfer agents act as transfer agent for 

publicly traded securities and are not 

FAST agents or DRS Limited 

Participants. But if a transfer agent 

chooses to act as transfer agent for an 

issuer of securities that requires it to 

become a FAST agent or DRS Limited 

Participant, then DTC has an interest 

and statutory responsibility to ensure 

that the securities held on its behalf at 

the transfer agent are safeguarded and 

that the settlement of transactions in 

those securities, which includes safe 

and efficient transfers in ownership, 

occurs in a prompt and accurate 

manner. 

With regards to specific operational 

requirements required by DTC’s rule, 

such as insurance requirements, 

physical security standards, audit 

requirements, and system modifications 

to support or enhance DRS 

functionality, the Commission believes 

that the amended rule contains 

standards that are appropriate and 

reasonably designed to achieve DTC’s 

goal of protecting the securities held by 

transfer agents on DTC’s behalf and on 

behalf of DTC’s participants and the 

participants’ customers. The 

Commission does not find it compelling 

to contend that just because DTC and 

other registered holders have not 

sustained economic losses, DTC’s 

insurance requirements are overly broad 

or unjustified. The point of the rule’s 

insurance requirement is to protect 

against losses before losses occur. 

Furthermore, if a transfer agent can 

demonstrate that its existing coverage or 

capitalization provide similar 

protections as the insurance required 

DTC, DTC has the discretion to grant a 

waiver from any or all of the 

requirement. This flexibility should 

provide DTC the ability to properly 

address situations where the required 

coverage is too onerous or ineffective for 

the type, amount, or dollar value of 

DTC’s securities held by the transfer 

agent. 

The Commission also finds little merit 

in the contention that the audit reports 

required by the rule are unwarranted or 

unnecessarily costly. The Commission 

believes that requiring transfer agents to 

provide to DTC the Annual Study of 

Evaluation of Internal Accounting 

Controls, conducted pursuant to Rule 

17Ad–13, and a SAS–70 audit report, if 

the agent has already obtained such a 

report for other purposes, are reasonable 

in light of DTC’s statutory obligations to 

ensure the safeguarding of its securities. 

These audit reports provide DTC with 

additional information about the 

adequacy of the transfer agent’s 

operational capabilities and internal 

controls for the transfer of record 

ownership and the safeguarding of 

related securities and funds. This is not 

only relevant but material information 

to DTC. In addition, because DTC’s rule 

requires that transfer agents provide 

DTC with documents that have already 

been produced by the transfer agent for 

other purposes and should be in the 

transfer agent’s possession, the 

Commission believes that there should 

be little or no additional expense and 

relatively little extra burden on transfer 

agents in providing these documents to 

DTC. 

Similarly, commenters’ concerns 

about requiring transfer agents to 

provide DTC with a copy of the two 

most recent compliance or deficiency 

correspondences from the Commission 

and all notices of alleged material 

deficiencies documented by the 

Commission appear to be misplaced. 

While the Commission appreciates the 

sensitive nature of transfer agent 

examination reports and the need to 

ensure the confidentiality of all 

information contained in those reports, 

the Commission believes nonetheless 

that DTC’s request for these documents 

is reasonable. Information contained in 

those reports should allow DTC to better 

manage any potential risks associated 

with the transfer agent’s ability to 

transfer securities, maintain ownership 

records, or operate its business in a safe 

manner. 

Even though some commenters 

objected to DTC’s provision requiring 

transfer agents to send DTC a file 

indicating a transaction advice has been 

sent to investors for each DRS 

withdrawal-by-transfers, the 

Commission believes DTC has a valid 

interest in requiring notice that 

investors have obtained a transaction 

advice from transfer agents. The file 

required to be sent to DTC will provide 

confirmation that the transaction advice 

has been sent to the investor so that 

DTC can close out its pending transfer 

position or file (sometimes referred to as 

an open transfer record). If that position 

is not closed, then DTC’s records will 

show that the transfer remains open and 

it will become an outstanding aged 

transfer. To avoid this, DTC is requiring 

transfer agents to send a notice that the 

transfer has been completed by sending 

the investor a transaction advice. This 

process is similar to that of the current 

process when a transfer agent notifies 

DTC that a certificate has been mailed 

to the investor. 

Finally, the Commission believes that 

commenters’ concerns regarding the 

rule’s clarification of DTC’s standard of 

care provision are unfounded. The 

purpose of the rule change is to clarify 

that DTC shall not be liable to 

participants for acts or omissions of any 

third party (including without 

limitation any depository, custodian, 

sub-custodian, clearing or settlement 

system, transfer agent, registrar, data 

communication service or delivery 

service). DTC’s Rule 6 applies to DTC’s 

relationship with its participants, not 

FAST agents. Therefore, this particular 

provision does not have any impact on 

FAST Agents that are not also 

participants. The provision does not 

shift liability from DTC to FAST Agents 

or absolve DTC from liability to FAST 

Agents. 

V. Conclusion 

On the basis of the foregoing, the 

Commission finds that the proposed 

rule change, as amended, is consistent 

with the requirements of the Act and in 

particular with the requirements of 

Section 6(b)(5) 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, as amended, (File No. SR– 

DTC–2006–16) be and hereby is 

approved.41

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.42

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–16455 Filed 7–10–09; 8:45 am] 

BILLING CODE 8010–01–P 

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