Document ID: SEC-2007-0875-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Depository Trust Co.
Posted Date: 2007-06-28T04:00Z

[Federal Register: June 28, 2007 (Volume 72, Number 124)]
[Notices]               
[Page 35532-35535]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28jn07-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55940; File No. SR-DTC-2007-04]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change Relating to a Policy 
Statement on the Eligibility of Foreign Securities

June 21, 2007.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 19, 2007, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change 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. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change would add a new Policy Statement on the 
Eligibility of Foreign Securities to DTC's rules.\2\
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    \2\ A Policy Statement is used by DTC to clarify and consolidate 
the Rules of DTC with respect to the subject of the Policy 
Statement. A Policy Statement is a part of the Rules of DTC. As 
such, pursuant to Rule 2 Section 1 of the DTC Rules and the 
Participants Agreement that participants enter into with DTC, a 
Policy Statement is binding on DTC participants.
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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.\3\
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    \3\ The Commission has modified parts of these statements.
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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 Policy Statement is to set forth in a single 
place in an accessible manner the criteria and procedures for making 
the securities of foreign issuers (``Foreign Securities'') eligible for 
deposit and book-entry transfer through the facilities of DTC in 
accordance with the Securities Act of 1933 (``Securities Act'') \4\ and 
the rules and regulations of the Commission thereunder. For purposes of 
the Policy Statement, (1) the term ``security'' has the meaning 
provided in Section 2(a)(1) of the Securities Act,\5\ (2) the term 
``foreign issuer'' has the meaning provided in Rule 405 of the 
Commission under the Securities Act (and includes both a ``foreign 
government'' and a ``foreign private issuer'' as defined in Rule 405) 
\6\ and (3) capitalized terms that are used but not otherwise defined 
in the Policy Statement have the meanings given to such terms in the 
Rules of DTC.
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    \4\ 15 U.S.C. 77 et seq.
    \5\ 15 U.S.C. 77b(a)(1).
    \6\ 17 CFR 230.405. The term foreign issuer means any issuer 
which is a foreign government, a national of any foreign country or 
a corporation or other organization incorporated or organized under 
the laws of any foreign country.
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    The Policy Statement covers both Foreign Securities deposited with 
DTC at the time that such Foreign Securities are first distributed 
(referred to as ``new issues'' in the DTC system) and Foreign 
Securities deposited with DTC subsequent to the time that such Foreign 
Securities are first distributed (referred to as ``older issues'' in 
the DTC system). The criteria and procedures for making new issues of 
Foreign Securities eligible for deposit and book-entry transfer through 
the facilities of DTC have previously been codified by DTC. The 
criteria and procedures for making older issues of Foreign Securities 
eligible for deposit and book-entry transfer through the facilities of 
DTC have not previously been codified by DTC. Accordingly, what would 
be new in the Policy Statement are the criteria and procedures for 
making older issues of unregistered Foreign Securities DTC-eligible.\7\ 
These are generally securities that may be freely traded outside the 
U.S. over the counter or on foreign exchanges or traded in the U.S. 
over the counter market subject to the resale restrictions of the 
Securities Act.
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    \7\ Registered securities, whether new issues or older issues, 
whether foreign or domestic, can always be made DTC-eligible.
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    The proposed rule change, as it relates to older issues of 
unregistered Foreign

[[Page 35533]]

Securities, represents an extension, with no material change, in 
arrangements that now apply to new issues of unregistered Foreign 
Securities, including securities that may be resold without 
registration under the Securities Act pursuant to Regulation S or Rule 
144A. The proposed rule change, by establishing the criteria and 
procedures for a wider but not fundamentally different range of 
unregistered Foreign Securities to settle at DTC would increase the 
transparency and reduce the risk and cost of transactions in these 
securities.
    At the present time, purchases and sales of older issues of 
unregistered Foreign Securities by U.S. investors typically settle 
through foreign intermediaries and central securities depositories in 
multiple jurisdictions. By having these transactions settle at DTC, 
U.S. investors and intermediaries would be able to benefit from (1) DTC 
risk management controls approved by the Commission and the Board of 
Governors of the Federal Reserve System, (2) a more visible and less 
complicated settlement process and (3) greater control over settlement 
costs with fees determined by the user-representative board of 
directors of DTC.
    In all cases and circumstances, participants of DTC would be 
responsible for determining that their deposit of older issues of 
unregistered Foreign Securities with DTC, as well as their transactions 
in such securities through the facilities of DTC, are in compliance 
with the Rules of DTC and the federal securities laws.
Categories of Foreign Securities Eligible for DTC Services
    Under the Policy Statement, the following categories of Foreign 
Securities would be eligible for DTC book-entry delivery services as 
and to the extent set forth below: \8\
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    \8\ The categories of Foreign Regulation SSecurities, Foreign 
Rule 144A Securities, Foreign Restricted Securities and Foreign 
Other Eligible Securities are not all mutually exclusive. For 
example, (i) Foreign Regulation S Securities may be resold to 
qualified institutional buyers (as defined in Rule 144A) pursuant to 
Rule 144A, (ii) Foreign Rule 144A Securities may be resold in 
offshore transactions (as defined in Regulation S) pursuant to 
Regulation S and (iii) Foreign Regulation S Securities and Foreign 
Rule 144A Securities that are restricted securities (as defined in 
Rule 144) may be resold pursuant to Rule 144.
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    (1) Foreign Securities that are registered under the Securities Act 
(``Registered Foreign Securities'') would be eligible for all DTC 
services.
    (2) Foreign Securities that are exempt from registration under the 
Securities Act pursuant to an exemption that does not involve any 
resale restrictions (``Exempt Foreign Securities'') would be eligible 
for all DTC services.
    (3) Foreign Securities that may be offered and sold without 
registration under the Securities Act pursuant to Regulation S 
(``Foreign Regulation S Securities'') \9\ would be eligible for all DTC 
services. This would include Category 1 securities, Category 2 
securities and Category 3 securities under Regulation S.\10\
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    \9\ 17 CFR 230.901 through 905.
    \10\ Category 1 of the primary offering safe harbor of 
Regulation S includes the securities of foreign issuers for which 
there is no substantial U.S. market in the subject securities, 
securities being offered by foreign (or domestic) issuers in 
overseas directed offerings, the securities of foreign governments 
and securities being offered by foreign issuers pursuant to employee 
benefit plans. Category 2 of the primary offering safe harbor of 
Regulation S includes the equity securities of reporting foreign 
issuers, the debt securities of foreign (or domestic) reporting 
issuers and the debt securities of nonreporting foreign issuers even 
if there is substantial U.S. market interest in the subject 
securities. Category 3 of the primary offering safe harbor of 
Regulation S includes the equity securities of non-reporting foreign 
issuers with substantial U.S. market interest in the subject 
securities. 17 CFR 230.903.
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    (4) Foreign Securities that may be resold without registration 
under the Securities Act pursuant to Rule 144A (``Foreign Rule 144A 
Securities'') \11\ would be eligible for all DTC services. If such 
Foreign Rule 144A Securities are not investment grade securities (i.e., 
nonconvertible debt securities or nonconvertible preferred stock rated 
in one of the top four categories by a nationally recognized 
statistical rating agency), then to be eligible for DTC services such 
Foreign Rule 144A Securities would have to be securities designated for 
inclusion in a system of a self-regulatory organization approved by the 
Commission for the reporting of quotation and trade information on Rule 
144A transactions (``SRO Rule 144A System'').\12\
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    \11\ 17 CFR 230.144A.
    \12\ For the requirement that securities other than investment 
grade securities be designated for inclusion in a Self Regulatory 
Organization (``SRO'') Rule 144A System approved by the Commission, 
see Securities Exchange Act Release No. 33327 (December 13, 1993), 
58 FR 67878 (December 22, 1993) (File No. SR-DTC-90-06) (Order 
Approving a Proposed Rule Change by DTC Relating to the Eligibility 
of Rule 144A Securities at DTC).
    The original SRO Rule 144A System approved by the Commission was 
the Private Offerings, Resales, and Trading through Automated 
Linkages (``PORTAL'') Market System operated by the National 
Association of Securities Dealers, Inc. (``NASD''). For a 
description of the PORTAL Market System and the relationship between 
the PORTAL Market System and DTC, see Securities Exchange Act 
Release Nos. 27956 (April 27, 1990), 55 FR 18781 (May 4, 1990) (File 
No. SR-NASD-88-23) (Order Approving Proposed Rule Change and Notice 
of Filing and Order Granting Accelerated Approval to Amendments to 
Proposed Rule of NASD Relating to the Operation of the PORTAL 
Market) and 33326 (December 13, 1993), 58 FR 66388 (December 22, 
1993) (File No. SR-NASD-91-5) (Order Approving a Proposed Rule 
Change Relating to the Operation of the PORTAL Market).
    In 2001, the Commission approved an NASD proposed rule change to 
require PORTAL participants to submit trade reports of secondary 
market transactions in PORTAL equity securities through the NASD 
Automated Confirmation and Transaction Service (``ACT'') and PORTAL 
high-yield debt securities through the NASD Trade Reporting and 
Comparison Entry Service (``TRACE'') and to redefine the PORTAL 
Market System to include ACT and TRACE. Securities Exchange Act 
Release No. 44042 (March 6, 2001), 66 FR 14969 (March 13, 2001) 
(File No. SR-NASD-99-66) (Order Approving Proposed Rule Change 
Relating to the Implementation of Mandatory Trade Reporting for 
PORTAL Securities). As a result, ACT and TRACE are each an SRO Rule 
144A System for purposes of the DTC Rule 144A eligibility 
requirement.
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    (5) Foreign Securities that may be resold without registration 
under the Securities Act pursuant to Rule 144 (``Foreign Restricted 
Securities'') \13\ would be eligible for all DTC services.
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    \13\ 17 CFR 230.144.
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    (6) Foreign Securities that may be resold without registration 
under the Securities Act pursuant to any other exemption (``Foreign 
Other Eligible Securities'') would be eligible for all DTC services. 
This shall include without limitation an exemption pursuant to Rule 801 
\14\ in connection with a rights offering or an exemption pursuant to 
Rule 802 \15\ in connection with an exchange offer.
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    \14\ 17 CFR 230.801.
    \15\ 17 CFR 230.802.
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    Although all the foregoing categories of Foreign Securities would 
be eligible for deposit and book-entry transfer through the facilities 
of DTC, DTC would have the right adopt associated procedures to 
determine in accordance with Rule 5, Section 1 of the DTC Rules, and 
its obligations as a registered clearing agency subject to regulation 
by the Commission whether any particular issue would be accepted for 
deposit and made eligible for some or all DTC services.
Responsibilities of Issuers and Participants
    Issuers and participants would be responsible for determining that 
their deposit of Foreign Securities with DTC and their transactions in 
Foreign Securities through the facilities of DTC are in compliance with 
the Rules of DTC and the federal securities laws. In particular and 
without limitation, issuers and participants would be responsible not 
to engage in any transactions in Foreign Securities, including any 
distribution of unregistered Foreign Securities through the facilities 
of DTC, in violation of the Securities Act and the rules and 
regulations of the Commission

[[Page 35534]]

thereunder. These responsibilities of issuers and participants are 
based on the following:
    (1) Issuers and participants depositing Foreign Securities with DTC 
and participants engaging in transactions in Foreign Securities through 
the facilities of DTC are subject to the Rules of DTC and the federal 
securities laws.
    (2) Rule 2 Section 7 of the DTC Rules provides, ``In connection 
with their use of the Corporation's [DTC's] services, Participants and 
Pledgees must comply with all applicable laws, including all applicable 
laws relating to securities, taxation and money laundering.''
    (3) Section 7(b) of the ``Operational Arrangements (Necessary for 
an Issue to Become and Remain Eligible for DTC Services)'' of DTC 
(``DTC Operational Arrangements'') which relate to book-entry only 
(``BEO'') issues being made eligible for DTC services provides:

    Issuer recognizes that DTC does not in any way undertake to, and 
shall not have any responsibility to, monitor or ascertain the 
compliance of any transactions in the Securities with the following, 
as amended from time to time: (1) Any exemptions from registration 
under the Securities Act of 1933; (2) the Investment Company Act of 
1940; (3) the Employee Retirement Income Security Act of 1974; (4) 
the Internal Revenue Code of 1986; (5) any rules of any self-
regulatory organizations (as defined under the Securities Exchange 
Act of 1934); or (6) any other local, state, federal, or foreign 
laws or regulations thereunder.

This and other representations made by issuers to DTC pursuant to the 
DTC Operational Arrangements are mirrored in the Letter of 
Representations that DTC receives from issuers in connection with their 
deposits of BEO issues with DTC.
    (4) In 1994, in an order clarifying certain language in the Rule 
144A approval order, the Commission concurred in the position taken by 
DTC with respect to Rule 5 of the DTC Rules that ``Rule 5 does not 
require DTC to determine whether securities, when deposited at DTC, may 
be transferred lawfully by book-entry in light of the Federal 
securities law.'' \16\ The original Rule 144A order included the 
statement that Rule 5, Section 1 of DTC's Rule required DTC to 
determine whether in light of the Federal securities laws, particularly 
the provisions of Rules 144, 144A, and 145, the securities when 
deposited with DTC may be lawfully transferred by book-entry. DTC filed 
the rule change in order to clarify that DTC Rule 5 does not require 
DTC to determine whether securities deposited at DTC may be transferred 
lawfully pursuant to Federal securities laws. DTC subsequently amended 
Rule 5 to delete any implication that DTC was under any statutory or 
contractual obligation to determine whether securities deposited with 
DTC could be legally transferred by book-entry.\17\
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    \16\ Securities Exchange Act Release No. 33672 (February 23, 
1994), 59 FR 10186 (March 3, 1994) (File No. SR-DTC-93-14) (Order 
Approving Proposed Rule Change Relating to a Clarification of Rule 
5).
    \17\ The position taken by DTC with respect to original Rule 5 
order and the clarification to Rule 5 are in accord with Section 
17A(b)(3)(A) of the Act, which provides that a clearing agency shall 
not be registered under Section 17A unless the Commission determines 
that ``[s]uch clearing agency is so organized and has the capacity 
to * * * enforce (subject to any rule or order of the Commission 
pursuant to Section 17(d) or 19(g)(2) of this title) compliance by 
its participants with the rules of the clearing agency, and to carry 
out the purposes of this section.''15 U.S.C. 78q-1(b)(3)(A).
    Accordingly, a clearing agency is authorized and required to 
enforce against its participants the rules of the clearing agency 
and the provisions of Section 17A of the Exchange Act but is not 
authorized or required (because it does not have the jurisdiction or 
power) to enforce against its participants (or non-participant 
issuers or transfer agents) the provisions of the Securities Act and 
the rules and regulations of the Commission thereunder.
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DTC Procedures
    DTC implements a variety of measures designed to facilitate 
compliance by issuers and participants with their obligations to DTC 
and pursuant to the federal securities laws. These measures are set 
forth below with particular reference to the proposal for Foreign 
Securities.
    With respect to new issues of Foreign Securities:
    (1) For all Foreign Securities, DTC would require (a) from the 
Participant seeking DTC eligibility (e.g., the underwriter) an 
Eligibility Questionnaire that sets forth inter alia the basis on which 
the securities are eligible for deposit and book-entry transfer through 
the facilities of DTC and (b) from the issuer a Letter of 
Representations with representations that incorporate by reference 
substantially all of the standard representations set forth in the DTC 
Operational Arrangements.
    (2) For Foreign Regulation S Securities, DTC would require from the 
issuer a rider to the Letter of Representations with inter alia 
additional representations relating to the securities being eligible 
for resale pursuant to Regulation S and having a CUSIP or CINS 
identification number different from the CUSIP or CINS identification 
number of any registered securities of the issuer of the same class.
    (3) For Foreign Rule 144A Securities, DTC would require from the 
issuer a rider to the Letter of Representations with inter alia 
additional representations relating to the securities being eligible 
for resale pursuant to Rule 144A, having a CUSIP or CINS identification 
number different from the CUSIP or CINS identification number of any 
registered securities of the issuer of the same class and whether the 
securities are investment grade securities or securities designated for 
inclusion in an SRO Rule 144A System.
    With respect to older issues of Foreign Securities: \18\
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    \18\ Foreign Securities that have historically been traded only 
on foreign securities exchanges and in foreign over-the-counter 
markets can be deposited as older issues and transferred by book-
entry through the facilities of DTC, provided that they may legally 
be resold in the United States, i.e., they are registered under the 
Securities Act or they are eligible for resale in the United States 
without registration under the Securities Act.
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    (1) DTC (a) would determine that any unregistered Foreign 
Securities deposited with DTC have a CUSIP or CINS identification 
number that is different from the CUSIP or CINS identification of any 
registered securities of the issuer of the same class and (b) would 
confirm that any Foreign Rule 144A Securities deposited with DTC are 
investment grade securities or securities designated for inclusion in 
an SRO Rule 144A System.
    (2) DTC would require from any participant that wishes to deposit 
any unregistered Foreign Securities with DTC or engage in any 
transactions in unregistered Foreign Securities through the facilities 
of DTC a one-time blanket Letter of Representations (``Participant 
Foreign Securities BLOR'') with inter alia representations that such 
Participant (a) will not deposit any unregistered Foreign Securities 
with DTC unless such securities are eligible for resale without 
registration under the Securities Act and (b) will not engage in any 
transactions in Foreign Securities, including any distribution of 
unregistered Foreign Securities through the facilities of DTC, in 
violation of the Securities Act and the rules and regulations of the 
Commission thereunder.\19\ DTC would systemically block any Participant 
that has not executed a Participant Foreign Securities BLOR from (a) 
depositing any unregistered Foreign Securities with DTC or (b) engaging 
in any transactions in unregistered Foreign Securities through the 
facilities of DTC.
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    \19\ A form of the proposed Participant Foreign Securities BLOR 
is attached as Exhibit 2 to the proposed rule change filed by DTC 
with the Commission.
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Additional Documentation
    Although the foregoing documentation for new issues and older 
issues would be provided by issuers or

[[Page 35535]]

participants in connection with the deposit of Foreign Securities with 
DTC and/or as a condition to engaging in transactions in Foreign 
Securities through the facilities of DTC, DTC would have the right and 
could adopt associated procedures to determine in accordance with Rule 
5 Section 1 of the DTC Rules and its obligations as a registered 
clearing agency subject to regulation by the Commission whether any 
other or additional documentation would be required.
    Section 17A(a)(2)(A) of the Act directs the Commission to 
facilitate the establishment of a national system for the prompt and 
accurate clearance and settlement of securities transactions and the 
establishment of linked or coordinated facilities for clearance and 
settlement. The deposit and book-entry transfer of Foreign Securities 
through the facilities of DTC in accordance with the criteria and 
procedures set forth in the proposed Policy Statement would (1) enable 
DTC to provide its participants with prompt and accurate clearance and 
settlement of their cross-border securities transactions, (2) enable 
DTC to enhance and extend its linkages with foreign depositories and 
exchanges and (3) enable DTC to support the cross-border initiatives of 
U.S. broker-dealers, banks and exchanges.

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

    DTC does not believe that the proposed rule change would impose any 
burden on competition.

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

    No written comments relating to the proposed rule change have been 
solicited or received by DTC from members, participants or other 
persons. DTC will notify the Commission of any written comments it 
receives.

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 the self-regulatory organization consents, 
the Commission will:
    (a) By order approve the 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, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-DTC-2007-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2007-04. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of DTC. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-DTC-2007-04 and should be 
submitted on or before July 19, 2007.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-12531 Filed 6-27-07; 8:45 am]

BILLING CODE 8010-01-P