Document ID: SEC-2008-1223-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2008-09-05T04:00Z

[Federal Register: September 5, 2008 (Volume 73, Number 173)]
[Notices]               
[Page 51870-51872]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05se08-90]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58436; File No. SR-DTC-2008-11]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of a Proposed Rule Change To Implement a New Service 
to Allow Issuers To Track and Limit the Number of Beneficial Owners for 
an Individual CUSIP

 August 27, 2008.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 6, 2008, 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 purpose of the rule change is to implement a new service that 
will allow issuers, either themselves or through an issuer-designated 
administrator, to track and limit the number of beneficial owners for 
an individual CUSIP. This service would be called the Security Holder 
Tracking Service (``SH Tracking Service'').

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.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Background
    A group of investment banks requested that DTC assist them in 
providing greater liquidity and access to capital for securities of 
closely held

[[Page 51871]]

issuers that are traded in private equities markets.\2\ Specifically, 
this group asked DTC to build a system that would allow these closely 
held securities to be eligible for DTC's depository services while 
allowing the issuer, typically through an agent, to monitor and control 
the number and character (e.g., qualified institutional buyers or 
``QIBs'') of beneficial owners of its securities.\3\ Currently, the 
processing and settlement of transactions of such issues is 
accomplished in a physical environment outside DTC.\4\
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    \2\ Among the securities at issue are those that are commonly 
referred to as ``Rule 144A securities.'' These securities are 
transacted pursuant to the terms of Rule 144A (17 CFR 230.144A), 
which provides a safe harbor from the registration requirements of 
Section 5 of the Securities Act of 1933. 15 U.S.C. 77e.
    \3\ Issuers must control the number of beneficial owners 
pursuant to certain regulatory registration and reporting 
requirements. In order for issuers to be able to avoid the periodic 
reporting requirements imposed by the Act they must not have more 
than 500 beneficial owners. 15 U.S.C. 78l(g), 15 U.S.C. 78m(a), 15 
U.S.C. 78o(d).
    \4\ DTC already allows Rule 144A securities that are not 
investment grade rated debt to be eligible for deposit, book-entry 
delivery, and other depository services only if the Rule 144A 
securities are designated for inclusion in a system of a self-
regulatory organization approved by the Commission for the reporting 
of quotation and trade information of Rule 144A transactions (``SRO 
system''). Securities Exchange Act Release No. 33327 (Dec. 13, 
1993); 58 FR 67878 (Dec. 22, 1993).
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2. Proposed Rule Change
    DTC proposes to implement its new SH Tracking Service that would 
facilitate the book-entry settlement and asset servicing for securities 
that are privately transacted. This service would allow issuers to 
track and limit the number of beneficial owners of its securities 
(``Tracked Securities'').
    The eligibility process for a Tracked Security to be made and 
remain DTC-eligible would not change from DTC's current process. 
However, under the new proposed system, DTC would be requested in 
writing to set up a specific CUSIP for tracking such securities \5\ and 
would be notified who will perform the function of the issuer's 
administrator for the CUSIP in the SH Tracking Service.\6\ Upon receipt 
of all of such documentation, DTC would make the CUSIP DTC-eligible and 
would activate the tracking indicator on its security master file. 
Additionally, once it is made eligible, DTC would perform asset 
servicing for the issue.
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    \5\ DTC anticipates that this instruction will come from the 
underwriter at the time of the initial distribution at DTC.
    \6\ DTC anticipates that the issuer's transfer agent will serve 
as its administrator.
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    The issuer's administrator would control movements of the 
particular CUSIP for which it had been appointed. Once the tracking 
indicator has been activated on the master file and the Administrator 
has been appointed, no transfer of the securities would take place in 
the Tracked Security without the approval of the administrator through 
DTC's Inventory Management System (``IMS''). The administrator, based 
on requirements of the issuer, would be solely responsible for 
determining whether a transaction should be effected in DTC. Once 
approved by the administrator, DTC would perform centralized book-entry 
settlement. IMS would only allow an administrator access to view and 
approve transactions for CUSIPs for which it had been appointed 
administrator as reflected in DTC's records.
    Because DTC would be relying solely on the instructions of the 
administrator in order to effect settlement in Tracked Securities and 
would have no knowledge of the number or character of the underlying 
beneficial owners, use of the SH Tracking Service by any party would 
constitute an agreement that DTC shall not be liable for any loss or 
damages related to the use of the SH Tracking System. Each user of the 
SH Tracking Service would agree to indemnify and hold harmless DTC and 
its affiliates from and against any and all losses, damages, 
liabilities, costs, judgments, charges, and expenses arising out of or 
relating to the use of the SH Tracking Service.
    The Tracked Securities would not be held as part of a Participant's 
general free account and would not be considered eligible collateral in 
DTC's settlement system.
    Although the SH Tracking Service was developed to address the 
specific concerns of Rule144A securities, in practice DTC envisions 
that it could be utilized for other types of securities for which the 
number or character of the beneficial owners requires some level of 
control.
3. Fees
    In an effort to recover the costs of building the SH Tracking 
Service, DTC proposes the following fees to be added to its Fee 
Schedule:
     $25,000 per CUSIP for SH Tracking Services.
     $5 per delivery and receive for Tracked Securities.
     $5 per receive and delivery for reclaims of Tracked 
Securities.
    DTC believes that the proposed rule change is consistent with the 
requirements of section 17A of the Act \7\ and the rules and 
regulations thereunder as it allows for more efficient processing of 
transactions that are currently being effected outside of DTC by 
physical processing. Therefore, it will not adversely affect the 
safeguarding of funds or securities in DTC's custody and control or for 
which it is responsible.
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    \7\ 15 U.S.C. 78q-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will have any 
impact, or impose any burden, on competition.

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

    DTC has not solicited or received written comments relating to the 
proposed rule change. 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 such 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 No. SR-DTC-2008-11 on the subject line.

Paper Comments

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

[[Page 51872]]

All submissions should refer to File No. SR-DTC-2008-11. 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. to 3 p.m. Copies of such filing also will be available for 
inspection and copying at DTC's principal office and on DTC's Web site 
at http://www.dtcc.com/legal/rule_filings/dtc/2008.php. 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 No. SR-DTC-2008-11 and should be 
submitted on or before September 26, 2008.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-20612 Filed 9-4-08; 8:45 am]

BILLING CODE 8010-01-P