Document ID: SEC-2006-0900-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NYSE Arca, Inc.
Posted Date: 2006-07-18T04:00Z

[Federal Register: July 18, 2006 (Volume 71, Number 137)]
[Notices]               
[Page 40768-40770]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18jy06-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54126; File No. SR-NYSEArca-2006-31]

 
Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the NYSE Arca, Inc. Amending Rules To Mandate Listed 
Companies Become Eligible To Participate in a Direct Registration 
System

July 11, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 19, 2006, NYSE Arca, 
Inc. (``NYSE Arca'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I, II, and 
III below, which items have been prepared primarily by NYSE Arca. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested parties.
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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

    NYSE Arca, through its wholly owned subsidiary NYSE Arca Equities, 
Inc. (``NYSE Arca Equities''), proposes to amend its rules to mandate 
that all listed companies become eligible to participate in a Direct 
Registration System (``DRS'') administered by a clearing agency 
registered under section 17A of the Act.

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

    In its filing with the Commission, NYSE Arca 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. The NYSE Arca has prepared summaries, set forth in 
sections (A), (B), and (C) below, of the most significant aspects of 
these statements.\2\
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    \2\ The Commission has modified portions of the text of the 
summaries prepared by the NYSE Arca.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    NYSE Arca, through its wholly-owned subsidiary NYSE Arca Equities, 
proposes to amend its rules to mandate that all listed companies become 
eligible to participate in DRS administered by a clearing agency 
registered under section 17A of the Act.
    DRS is a system that allows an investor to establish either through 
the issuer's transfer agent or through the investor's broker-dealer a 
book-entry position in eligible securities on the books of the issuer 
and to electronically transfer her position between the transfer agent 
and the broker-dealer.\3\ DRS, therefore, allows an investor to have 
eligible securities registered in her name without having a certificate 
issued to her and to electronically transfer, thereby eliminating the 
risk and delays associated with the use of certificates, her securities 
to her broker-dealer in order to effect a transaction.
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    \3\ Currently, the only registered clearing agency operating a 
DRS is The Depository Trust Company (``DTC''). For a 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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    In 2004, the Commission issued a concept release, Securities 
Transaction Settlement, discussing whether self-regulatory 
organizations (``SROs'') that list securities should adopt rules to 
require issuers to participate in DRS.\4\ Subsequently, representations 
of the New York Stock Exchange, the NASDAQ Stock Market, the American 
Stock Exchange, DTC, and the Securities Industry Association entered 
into discussions that resulted in the decision to propose common rules 
that would require listed companies to become eligible to participate 
in DRS but would not require listed companies to participate in DRS.\5\ 
There is an expectation that requiring listed

[[Page 40769]]

companies to be eligible to participate in DRS will accelerate the 
trend already evident among companies to participate in DRS.
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    \4\ Securities Exchange Act Release No. 49405 (March 11, 2004), 
69 FR 12922 (March 18, 2004), [File No. S7-13-04].
    \5\ The Commission has published notices for proposed rule 
changes filed by the New York Stock Exchange LLC, NASDAQ Stock 
Market LLC, and the American Stock Exchange LLC that would require 
certain listed companies securities become DRS eligible. Securities 
Exchange Act Release Nos. 53912 (May 31, 2006), 71 FR 33030 (June 7, 
2006) [File No. SR-NYSE-2006-29]; 53913 (May 31, 2006), 71 FR 33024 
(June 7, 2006) [File No. SR-NASDAQ-2006-008]; and 53911 (May 31, 
2006), 71 FR 33009 (June 7, 2006) [File No. SR-Amex-2006-40].
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    Under the proposed rule change, NYSE Arca will impose its DRS 
eligibility requirement pursuant to proposed new Rule 7.62(c).\6\ The 
proposed new rule does not require that securities listed for trading 
on NYSE Arca must be eligible for the DRS. Rather it requires listed 
companies' securities be eligible for a direct registration system 
operated by a clearing agency, as defined in section 3(a)(23) of the 
Act,\7\ that is registered with the Commission pursuant to section 
17A(b)(2) of the Act. Therefore, while the DRS operated by DTC is 
currently the only DRS facility meeting the definition, proposed new 
Rule 7.62(c) could provide issuers with the option of using another 
qualified DRS if one should exist in the future.
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    \6\ The exact text of the NYSE Arca prepared rule change is set 
forth in its filing, which can be found at http://www.nysearca.com/regulation/filings
.

    \7\ 15 U.S.C. 78a.
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    Currently, in order to make a security DRS-eligible in DRS operated 
by DTC, the issuer must have a transfer agent which is a DTC DRS 
Limited Participant.\8\ NYSE Arca understands that the larger transfer 
agents serving NYSE Arca's listed company community are already 
eligible to participate in DRS. However, taking into account the 
diversity of the issuers and transfer agents across all the markets 
that will be required to make securities eligible for DRS and 
facilitate DRS eligibility, some transfer agents may need to take steps 
to become eligible to participate in DRS, and some issuers may decide 
to change their transfer agent. In addition, NYSE Arca has been 
notified that some issuers may need to amend their certificates of 
incorporation or their by-laws before they can make their securities 
DRS eligible.
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    \8\ 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. SR7-DTC-96-15].
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    To allow sufficient time for any such necessary actions, NYSE Arca 
proposes to impose the DRS eligibility requirement in two steps. 
Companies listing for the first time should have greater flexibility to 
conform to the eligibility requirements; therefore, proposed Rule 
7.62(c) would require all securities initially listing on NYSE Arca on 
or after January 1, 2007, be eligible for DRS at the time of listing. 
This provision does not extend to securities of companies (i) which 
already have securities listed on the NYSE Arca, (ii) which immediately 
prior to such listing had securities listed on another registered 
securities exchange in the U.S., or (iii) which are specifically 
permitted under NYSE Arca's rules to be and which are book-entry only. 
On and after January 1, 2008, all securities listed on the NYSE Arca 
will be required to be eligible for DRS except those securities which 
are specifically permitted under NYSE Arca rules to be and which are 
book-entry only. The securities which NYSE Arca permits to be book-
entry only include all debt securities, securities listed or traded 
pursuant to Rule 5.2(j), securities listed or traded pursuant to Rule 
8, and nonconvertible stock.\9\
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    \9\ NYSE Arca's Rule 5(j) pertains to, among other things, 
equity linked notes, investment company units, index-linked 
exchangeable notes, equity gold shares, index-linked securities. 
Rule 8 pertains to currency and index warrants.
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(2) Statutory Basis
    The statutory basis under the Act for this proposed rule change is 
the requirement under section 6(b)(5) of the Act, which requires, among 
other things, that the rules of an exchange are 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.\10\ NYSE Arca believes that 
the proposed new Rule 7.62(c) is consistent with its obligations under 
section 6(b)(5) because issuers will be encouraged to use DRS, which 
should facilitate reducing the use of securities certificates and in 
turn should promote more efficient clearing and settling of securities 
transactions.
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    \10\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE Arca does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The NYSE Arca has neither solicited nor received written comments 
on the proposed rule change.

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 Number SR-NYSE-2006-29 in 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-NYSEArca-2006-31. 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 Section, 100 F Street, 
NE., Washington, DC 20549. Copies of such filings also

[[Page 40770]]

will be available for inspection and copying at the principal office of 
the NYSE Arca and on the NYSE Arca's Web site, http://www.nysearca.com. 

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-NYSEArca-2006-
31 and should be submitted on or before August 8, 2006.
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    \11\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-11313 Filed 7-17-06; 8:45 am]

BILLING CODE 8010-01-P