Document ID: SEC-2006-0898-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Depository Trust Co.
Posted Date: 2006-07-17T04:00Z

[Federal Register: July 17, 2006 (Volume 71, Number 136)]
[Notices]               
[Page 40562-40564]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17jy06-115]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54120; File No. SR-DTC-2005-14]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change Relating to Compliance With 
Regulations Administered by the Office of Foreign Assets Control

July 10, 2006.
    On September 9, 2005, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and on October 25, 2005, amended the proposed 
rule change. On November 30, 2005, DTC again amended the proposed rule 
change.\2\ Notice of the proposal was published in the Federal Register 
on November 14, 2005.\3\ The Commission received one comment letter.\4\ 
For the reasons discussed below, the Commission is approving the 
proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 17s(b)(1).
    \2\ Republication of notice of proposed rule change is not 
required because the second amendment to the proposed rule change 
merely clarified an existing DTC practice and did not alter the 
rights or responsibilities of DTC's participants.
    \3\ Securities Exchange Act Release No. 52721 (Nov. 2, 2005), 70 
FR 69179.
    \4\ Letter from Alan E. Sorcher, Vice President and Associate 
General Counsel, Securities Industry Association (Dec. 8, 2005), 
available online at http://www.sec.gov/rules/sro/dtc/dtc200514.shtml
.

---------------------------------------------------------------------------

I. Description

    DTC will revise its Deposit Service, Custody Service, and 
Withdrawals-By-Transfer Service procedures. These changes are based 
upon guidance from the U.S. Department of the Treasury's Office of 
Foreign Assets Control (``OFAC'') to DTC.

1. Deposit Service

    In order for a participant to receive immediate credit in its 
securities account at DTC for a deposit of registered securities, the 
participant will be required to certify to DTC that it has compared 
certain parties identified on the deposited certificate (this could 
include parties such as the issuer and all assignees) against OFAC's 
list of Specially Designated Nationals and against OFAC's regulations 
(collectively referred to as the ``OFAC list'') and that there were no 
matches identified by such comparison.
    In the case of a deposit of registered securities by a participant 
located outside the United States, including a

[[Page 40563]]

deposit by or for the benefit of a participant accepted at a depository 
facility located outside the United States, a participant will not 
receive immediate credit in its securities account. DTC will give 
credit for the deposit only after DTC has screened the parties on the 
deposit against the OFAC list and has identified no valid matches.

2. Custody Service

    With respect to securities and other financial instruments that are 
deposited pursuant to DTC's Custody Service procedures, DTC will act on 
the instructions of the depositing participant only after DTC has 
screened the parties on the deposit against the OFAC list and has 
identified no valid matches.\5\
---------------------------------------------------------------------------

    \5\ This is the clarification that was the subject of DTC's 
November 30, 2005, amendment to the proposed rule change. Supra note 
2.
---------------------------------------------------------------------------

3. Withdrawal-By-Transfer Service

    For securities on deposit that are sought to be withdrawn pursuant 
to DTC's Withdrawal-By-Transfer Service, including Withdrawal-By-
Transfer requests for securities in the Direct Registration System, DTC 
will act on the instructions of a withdrawing participant only after 
DTC has screened the investor in whose name the securities are to be 
registered against the OFAC list and has identified no valid match.
    For each service, in the event that DTC identifies a match against 
the OFAC list, DTC will first attempt to resolve false-positive 
matches. For valid matches, DTC will present the matches to 
participants that issued the instructions through a new Participant 
Terminal System function called ``OFAP.'' The participant will be 
required to review the registration of each certificate identified as a 
potential match and to respond to DTC for each such registration by 
providing information sufficient for DTC to conclude, in its sole 
discretion, that the registrant is or is not the person or entity 
listed on the OFAC list. Notwithstanding a participant's efforts to 
resolve matches against the OFAC list, if DTC, in its sole discretion, 
continues to believe that the registrant is the person or entity on the 
OFAC list, it will refuse to process the requested transaction.

II. Comment Letters

    The Commission received one comment letter on the proposed rule 
change from the Securities Industry Association (``SIA''). The SIA 
recommended that the Commission: (1) Allow for a reasonable 
implementation period that recognizes the significant changes broker-
dealers will likely have to make to their systems and procedures; (2) 
clarify a participant's obligations to screen names that appear as 
prior owners on securities certificates; (3) clarify how introducing 
and clearing brokers are to implement certain provisions of the rule; 
and (4) provide guidance on the application of Regulation S-P,\6\ which 
governs the privacy of consumer financial information, to the process 
by which participants provide information to DTC. Furthermore, the SIA 
expressed concern that the rule change might negatively affect 
investors because of potential delays in processing their transactions 
due to duplicative OFAC checks.
---------------------------------------------------------------------------

    \6\ 17 CFR 248.
---------------------------------------------------------------------------

    In response to these comments, the Commission first observes that 
DTC provided its participants with the planned technical specifications 
of the processing systems for its deposit services in March 2006.\7\ On 
June 30, 2006, DTC further notified participants that the OFAC 
certification process would be implemented in two phases: Phase 1, 
which will be effective August 7, 2006, for deposits affecting a small 
category of deposits received by DTC and which should require no 
systems changes by participants; and Phase 2, which will be effective 
sometime in the fourth quarter of 2006, for the remaining deposits and 
that will require systems enhancements.\8\ The Commission believes that 
these time implementation time frames should be sufficient for 
participants to make any needed systems changes and to make any needed 
operational changes required to implement DTC's revisions.
---------------------------------------------------------------------------

    \7\ ``Preparation for the Implementation of OFAC Certification 
of Deposits from Domestic Participants,'' DTC Important Notice 
B9382-06 (Mar. 31, 2006), available online at http://www.dtc.org/impNtc/exe/exe_9382-06.pdf
.

    \8\ ``Implementation of OFAC Certification of Deposits from 
Domestic Participants,'' DTC Important Notice B9899-06 (June 30, 
2006), available online at http://www.dtc.org/impNtc/exe/exe_9899-06.pdf
.

---------------------------------------------------------------------------

    Second, the ``property'' and ``property interests'' subject to OFAC 
regulations \9\ relate to items where the property owner has a 
``present, future, or contingent'' ownership interest.\10\ Since prior 
security owners whose names might appear on a securities certificate 
have no present, future, or contingent interest in that property, 
transacting in such certificates would not appear to be prohibited by 
OFAC regulations.
---------------------------------------------------------------------------

    \9\ See, e.g., 31 CFR 215.203.
    \10\ 31 CFR 515.311(a).
---------------------------------------------------------------------------

    Third, in approving the proposed rule change, the Commission does 
not take a position on whether a DTC participant can evade OFAC 
liability if it relies on a certification of an introducing broker-
dealer for which it acts that the introducing broker-dealer has 
screened the parties involved in the transaction against the OFAC list 
and that there were no matches identified by such screening.\11\
---------------------------------------------------------------------------

    \11\ The Commission notes that further inquiries relating to 
this subject should be directed to OFAC.
---------------------------------------------------------------------------

    Fourth, broker-dealers disclosing their customers' nonpublic 
personal information to comply with OFAC or DTC rules could rely on an 
exception from Regulation S-P's notice and opt out requirements for 
disclosures made to comply with Federal, state, or local laws, rules 
and other applicable legal requirements.\12\ Recipients of information 
disclosed under this exception would be subject to Regulation S-P's 
limitations on the redisclosure and reuse of such information.\13\
---------------------------------------------------------------------------

    \12\ See 17 CFR 248.15(a)(7)(i).
    \13\ See, e.g., 17 CFR 248.11(a).
---------------------------------------------------------------------------

    With respect to the SIA's concern that some investors might be 
negatively affected by potentials delays in processing duplicative OFAC 
checks, the Commission notes that any such potential delays in 
processing should be minimal and well justified in light of the 
importance of the goals and purposes of doing such checks.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to assure the safeguarding 
of securities and funds that are in its custody or control.\14\ DTC, 
like all U.S. persons and entities, is subject to OFAC regulations.\15\ 
Pursuant to recommendations made by OFAC, DTC is establishing formal 
procedures that will define and allocate responsibility for screening 
the names of persons and entities involved in furtherance of its 
obligation to refuse to transact directly or indirectly with restricted 
persons and entities. In so doing, DTC mitigates its regulatory risk of 
conducting business with such restricted individuals and entities, 
which could substantially imperil its or its participants assets, and 
therefore should help DTC assure the safeguarding of securities and 
funds that

[[Page 40564]]

are in its custody or control or for which it is responsible.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78q-1(b)(3)(F).
    \15\ The fines for violations can be substantial. Depending on 
the violation, criminal penalties can include fines ranging from 
$50,000 to $10,000,000 and imprisonment ranging from 10 to 30 years 
for willful violations. Civil penalties range from $11,000 to 
$1,000,000 for each violation.
---------------------------------------------------------------------------

    The OFAC-related procedures of, among others, DTC and broker-
dealers, are the subject of ongoing OFAC and Commission reviews to 
determine the effectiveness of these procedures in identifying and 
blocking transactions with restricted persons and entities. 
Accordingly, DTC has acknowledged that subject to the finding of these 
reviews it may need to revise its procedures in the future and has 
represented that it will continue to work with the Commission and OFAC 
to improve the effectiveness of its OFAC-related procedures.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \16\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2005-14) be, and hereby 
is, approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-11209 Filed 7-14-06; 8:45 am]

BILLING CODE 8010-01-P