Document ID: SEC-2007-0439-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.
Posted Date: 2007-03-22T04:00Z

[Federal Register: March 22, 2007 (Volume 72, Number 55)]
[Notices]               
[Page 13547-13549]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22mr07-108]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55482; File No. SR-Phlx-2006-69]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval of a Proposed Rule Change Amending Rules 
Relating to the Direct Registration System

March 15, 2007.

I. Introduction

    On October 31, 2006, the Philadelphia Stock Exchange, Inc. 
(``Phlx'') filed with the Securities and Exchange Commission 
(``Commission'') and on November 14, 2006, amended proposed rule change 
SR-Phlx-2006-69 pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act'').\1\ Notice of the proposal was published in the 
Federal Register on December 7, 2006.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54834 (November 29, 
2006), 71 FR 71013 (December 7, 2006) [File No. SR-Phlx-2006-69].
    \3\ Concurrent with this order, the Commission is approving 
similar rule changes submitted by the Boston Stock Exchange, Inc., 
and Chicago Stock Exchange, Inc. Securities Exchange Act Release 
Nos. 54832 (November 29, 2006), 71 FR 71000 (December 7, 2006) [File 
No. SR-BSE-2006-46] and 54833 (November 29, 2006), 71 FR 71004 
(December 7, 2006) [File No. SR-CHX-2006-33]. The Commission has 
also granted approval to similar rule changes submitted by the New 
York Stock Exchange LLC (``NYSE''), American Stock Exchange LLC 
(``Amex''), The NASDAQ Stock Market LLC (``Nasdaq''), and the NYSE 
Arca, Inc. (``NYSE Arca''). Securities 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].

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[[Page 13548]]

II. Description

    The Direct Registration System (``DRS'') allows an investor to 
establish either through the issuer's transfer agent or through the 
investor's broker-dealer a book-entry position on the books of the 
issuer and to electronically transfer her position between the transfer 
agent and the broker-dealer of her choice through a facility currently 
administered by The Depository Trust Company (``DTC'').\4\ DRS, 
therefore, enables an investor to have securities registered in her 
name on the books of the issuer without having a securities certificate 
issued to her and to electronically transfer her securities to her 
broker-dealer in order to effect a transaction without the risk, 
expenses, and delays associated with the use of securities 
certificates.
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    \4\ Currently, the only registered clearing agency operating a 
DRS is DTC. For a detailed description of DRS and the DRS facilities 
administered by DTC, see Securities Exchange Act Release Nos. 37931 
(November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR-
DTC-96-15] (order granting approval to establish DRS) and 41862 
(September 10, 1999), 64 FR 51162 (September 21, 1999), [File No. 
SR-DTC-99-16] (order approving implementation of the Profile 
Modification System).
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    Investors holding their securities in DRS retain the rights 
associated with securities certificates, including such rights as 
control of ownership and voting rights, without having the 
responsibility of holding and safeguarding securities certificates. In 
addition, in corporate actions such as reverse stock splits and 
mergers, cancellation of old shares and issuance of new shares are 
handled electronically with no securities certificates to be returned 
to or received from the transfer agent.
    In order to reduce the risks, costs, and delays associated with the 
use of securities certificates, new Phlx Rule 868 will require that 
certain securities be eligible for DRS.\5\ Rule 868 will require that 
on or after January 1, 2007, all securities initially listing on Phlx 
must be eligible for a DRS operated by a securities depository that is 
a clearing agency registered under Section 17A of the Act (``securities 
depository''). This provision will not extend to (i) Securities of 
companies which already have securities listed on Phlx; (ii) securities 
of companies which immediately prior to such listing had securities 
listed on another national securities exchange; (iii) derivative 
products,\6\ or (iv) securities (other than stocks) which are book-
entry-only.
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    \5\ The text of Phlx Rule 868 is set forth in its filing, which 
can be found at http://www.phlx.com/exchange/rulefilngs/2006/S-2006-69.pdf
.

    \6\ For purposes of proposed Rule 868, the term ``derivative 
products'' means standardized options issued by The Options Clearing 
Corporation (``OCC'') or other securities that are issued by OCC or 
another limited purpose entity or trust and that are based solely on 
the performance of an index or portfolio of other publicly traded 
securities. The term ``derivative product'' does not include 
warrants of any type or closed-end management investment companies.
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    Rule 868 will also require that on or after January 1, 2008, all 
securities listed on the Phlx must be eligible for a DRS operated by a 
securities depository. This provision will not extend to derivative 
products or securities (other than stocks) that are book-entry-only.
    Issuers and their transfer agents may incur initial costs when 
making an issue DRS-eligible as required by this rule change. In order 
to make a security DRS-eligible, the issuer must have a transfer agent 
which is a DRS Limited Participant at DTC.\7\ Transfer agents will need 
to meet certain DTC criteria, such as insurance and connectivity 
requirements, in order to become a DRS Limited Participant. Further, 
issuers may need to amend their corporate documents, such as their by-
laws or charter, in order to permit the issuance of book-entry shares. 
Phlx believes that the deadlines for DRS eligibility coupled with 
instructive communication by Phlx to issuers, allows issuers sufficient 
time to make the necessary changes to comply with the rule.
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    \7\ DTC's rules require that a transfer agent (including an 
issuer acting as its own transfer agent) acting for a company 
issuing securities in DRS must be a DRS Limited Participant. 
Securities Exchange Act Release No. 37931 (November 7, 1996), 61 FR 
58600 (November 15, 1996), [File No. SR-DTC-96-15].
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III. Discussion

    Section 6(b)(5) of the Act requires, among other things, that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
perfect the mechanism of a free and open market and a national market 
system, and in general to protect investors and the public interest.\8\ 
For the reasons described below, the Commission finds that Phlx's rule 
change is consistent with Section 6(b)(5) of the Act.
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    \8\ 15 U.S.C. 78f(b)(5).
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    The use of securities certificates has long been identified as an 
inefficient and risk-laden mechanism by which to hold and transfer 
ownership.\9\ Because securities certificates require manual 
processing, their use can result in significant delays and expenses in 
processing securities transactions and presents the risk of 
certificates being lost or stolen. Many of these costs and risks are 
ultimately borne by investors.\10\ Congress has recognized the problems 
and dangers that the use of certificates presents to the safe and 
efficient operation of the U.S. clearance and settlement system and has 
given the Commission the responsibility and the authority to address 
these issues.\11\
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    \9\ 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).
    \10\ Id.
    \11\ 15 U.S.C. 78q-1(a)(2)(A). Congress expressly envisioned the 
Commission's authority to extend to all aspects of the securities 
handling process of securities transactions within the United 
States, including activities by clearing agencies, depositories, 
corporate issuers, and transfer agents. See S. Rep. No. 75, 94th 
Cong., 1st Sess. at 55 (1975).
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    Consistent with its Congressional directives and in its efforts to 
improve efficiencies and decrease risks associated with processing 
securities transactions, the Commission has long advocated a reduction 
in the use of certificates in the trading environment by immobilization 
or dematerialization of securities and has encouraged the use of 
alternatives to holding securities in certificated form. Among other 
things, the Commission has approved the rule filings of self-regulatory 
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 \12\ and that require any security 
listed for trading must be depository eligible if possible.\13\ More

[[Page 13549]]

recently the Commission has approved the implementation and expansion 
of DRS.\14\
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    \12\ Securities 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).
    \13\ Securities Exchange Act Release No. 35798 (June 1, 1995), 
60 FR 30909 (June 12, 1995), [File Nos. SR-Amex-95-17; SR-BSE-95-09; 
SR-CHX-95-12; SR-NASD-95-24; SR-NYSE-95-19; SR-PSE-95-14; SR-Phlx-
95-34] (order approving rules setting forth depository eligibility 
requirements for issuers seeking to have their shares listed on the 
exchange).
    \14\ In 1996, the NYSE modified its listing criteria to permit 
listed companies to issue securities in book-entry form provided 
that the issue is included in DRS. Securities Exchange Act Release 
No. 37937 (November 8, 1996), 61 FR 58728 (November 18, 1996), [File 
No. SR-NYSE-96-29]. Similarly, the NASD modified its rule to require 
that if an issuer establishes a direct registration program, it must 
participate in an electronic link with a securities depository in 
order to facilitate the electronic transfer of the issue. Securities 
Exchange Act Release No. 39369 (November 26, 1997), 62 FR 64034 
(December 3, 1997), [File No. SR-97-51]. On July 30, 2002, the 
Commission approved a rule change proposed by the NYSE to amend NYSE 
Section 501.01 of the NYSE Listed Company Manual to allow a listed 
company to issue securities in a dematerialized or completely 
immobilized form and therefore not send stock certificates to record 
holders provided the company's stock is issued pursuant to a 
dividend reinvestment program or a stock purchase plan or is 
included in a DRS. Securities Exchange Act Release No. 46282 (July 
30, 2002), 67 FR 50972 (August 6, 2002), [File No. SR-NYSE-2001-33].
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    While the U.S. markets have made great progress in immobilization 
and dematerialization for institutional and broker-to-broker 
transactions, many industry representatives believe that the small 
percentage of securities held in certificated form (held mostly by 
retail investors) impose unnecessary risk and disproportionately large 
expense to the industry and to investors. In an attempt to help address 
this issue, Phlx's rule change, along with those of the NYSE, Amex, 
Nasdaq, NYSE Arca, BSE, and CHX, should help expand the use of DRS. As 
a result, risks, costs, and processing inefficiencies associated with 
the use of securities certificates should be reduced, and impediments 
to the perfection of the national market system should be removed. 
Additionally, those investors holding securities in listed securities 
certificates covered by the rule change that decide to hold their 
securities in DRS should realize the benefits of more accurate, 
quicker, and more cost-efficient transfers; faster distribution of sale 
proceeds; reduced number of lost or stolen certificates and a reduction 
in the associated certificate replacement costs; and consistency of 
owning in book-entry across asset classes.
    The Commission realizes that some issuers and transfer agents may 
bear expenses related to complying with the rule change. In order to 
make an issue DRS-eligible, issuers of listed companies must have a 
transfer agent which is a DRS Limited Participants and may need to 
amend their corporate governing documents to permit the issuance of 
book-entry shares. The Commission believes, however, that the long-term 
benefits of increased efficiencies and reduced costs and risks afforded 
by DRS outweigh the costs that some issuers and transfer agents may 
incur. Furthermore, the time frames built into the proposal should 
allow issuers and their transfer agents sufficient time to make any 
necessary changes to comply with the rule change.
    While the rule change should significantly reduce the number of 
transactions in securities for which settlement is effected by the 
physical delivery of securities certificates, it will not eliminate the 
ability of investors to obtain securities certificates provided the 
issuer has chosen to issue certificates. Such investors can continue to 
contact the issuer's transfer agent, either directly or through their 
broker-dealer, to obtain a securities certificate.
    Accordingly, for the reasons stated above the Commission finds that 
the rule change is consistent with Phlx's obligation under Section 6(b) 
of the Act to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in securities, to remove impediments 
to perfect the mechanism of a free and open market and a national 
market system, and in general to protect investors and the public 
interest.\15\
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    \15\ In approving the proposed rule change, the Commission 
considered the proposal's impact on the efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular 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 (File No. 
SR-Phlx-2006-69) be and hereby is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-5189 Filed 3-21-07; 8:45 am]

BILLING CODE 8010-01-P