Document ID: SEC-2016-1621-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2016-09-12T04:00Z

[Federal Register Volume 81, Number 176 (Monday, September 12, 2016)]
[Notices]
[Pages 62775-62780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21802]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78774; File No. SR-DTC-2016-003]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Amendment No. 1 and Order Instituting Proceedings 
To Determine Whether To Approve or Disapprove a Proposed Rule Change, 
as Modified by Amendment No. 1, To Impose Deposit Chills and Global 
Locks and Provide Fair Procedures to Issuers

September 6, 2016.

I. Introduction

    On May 27, 2016, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2016-003 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ The 
proposed rule change was published in the Federal Register on June 9, 
2016.\3\ The Commission received eight comment letters to the proposed 
rule change from five commenters, including two response letters from 
DTC.\4\ Pursuant to Section 19(b)(2) of the Act,\5\ on July 21, 2016, 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to disapprove the proposed rule 
change.\6\

[[Page 62776]]

On July 29, 2016, DTC filed Amendment No. 1 to the proposed rule 
change, as discussed below.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 77991 (June 3, 
2016), 81 FR 37232 (June 9, 2016) (SR-DTC-2016-003) (``Notice'').
    \4\ See letter from Charles V. Rossi, Chairman, The Securities 
Transfer Association (``STA''), Inc. Board Advisory Committee, dated 
June 30, 2016, to Brent J. Fields, Secretary, Commission (``STA 
Letter I''); letter from Dorian Deyet, dated June 30, 2016 (``Deyet 
Letter''); letter from Ann K. Shuman, Managing Director and Deputy 
General Counsel, DTC, dated July 21, 2016, to Brent J. Fields, 
Secretary, Commission (``DTC Letter I''); letter from Harvey Kesner 
(``Kesner''), Sichenzia, Ross, Friedman, Ference, dated August 11, 
2016, to Brent J. Fields, Secretary, Commission (``Kesner Letter 
I''); letter from Isaac Montal, Managing Director and Deputy General 
Counsel, DTC, dated August 22, 2016, to Brent J. Fields, Secretary, 
Commission (``DTC Letter II''); letter from Charles V. Rossi, 
Chairman, STA Board Advisory Committee, dated August 29, 2016, to 
Brent J. Fields, Secretary, Commission (``STA Letter II''); letter 
from Kesner, Sichenzia, Ross, Friedman, Ference, dated August 30, 
2016, to Brent J. Fields, Secretary, Commission (``Kesner Letter 
II''); and letter from Norman B. Arnoff (``Arnoff''), dated 
September 4, 2016 to Secretary Fields (``Arnoff Letter''). See 
comments on the proposed rule change (SR-DTC-2016-003), https://www.sec.gov/comments/sr-dtc-2016-003/dtc2016003.shtml.
    \5\ 15 U.S.C. 78s(b)(2).
    \6\ See Securities Exchange Act Release No. 78379 (July 21, 
2016), 81 FR 49309 (July 27, 2016). The Commission designated 
September 7, 2016, as the date by which it should approve, 
disapprove, or institute proceedings to determine whether to 
disapprove the proposed rule change.
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    The Commission is publishing this notice and order to solicit 
comments on Amendment No. 1 from interested persons and to institute 
proceedings under Section 19(b)(2)(B) of the Act \7\ to determine 
whether to approve or disapprove the proposed rule change, as modified 
by Amendment No. 1. The institution of proceedings does not indicate 
that the Commission has reached any conclusions with respect to any of 
the issues involved, nor does it mean that the Commission will 
ultimately disapprove the proposed rule change. Rather, the Commission 
seeks and encourages interested persons to provide additional comment 
on the proposed rule change to inform the Commission's analysis of 
whether to approve or disapprove the proposed rule change.
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    \7\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change and Notice of Filing of 
Amendment No. 1

    The proposed rule change, as modified by Amendment No. 1, would add 
Rule 33 to the Rules, By-Laws and Organization Certificate of DTC 
(``Rules'') to establish: (i) The circumstances under which DTC would 
impose and release a restriction on Deposits of an Eligible Security 
(``Deposit Chill'') or on book-entry services for an Eligible Security 
(``Global Lock''); and (ii) the fair procedures for notice and an 
opportunity for the issuer of the Eligible Security (``Issuer'') to 
challenge the Deposit Chill or Global Lock (each, a ``Restriction''), 
as described below.\8\
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    \8\ The description of the proposed rule change herein is based 
on the statements prepared by DTC in the Notice. Notice, supra note 
3, 81 FR at 37232-36. Each capitalized term not otherwise defined 
herein has its respective meaning as set forth in the Rules, 
available at http://www.dtcc.com/legal/rules-and-procedures.aspx.
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A. Background

i. DTC
    DTC stated that it is the nation's central securities depository, 
registered as a clearing agency under Section 17A of the Act,\9\ and 
that its deposit and book-entry transfer services help facilitate the 
operation of the nation's securities markets. According to DTC, by 
serving as registered holder of trillions of dollars of Securities, on 
a daily basis, DTC processes enormous volumes of securities 
transactions facilitated by book-entry movement of interests, without 
the need to transfer physical certificates.
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    \9\ See Securities Exchange Act Release No. 20221 (September 23, 
1983), 48 FR 45167 (October 3, 1983) (600-1).
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    DTC performs services and maintains Securities Accounts for its 
Participants, primarily banks and broker dealers, pursuant to its Rules 
and Procedures. Participants agree to be bound by DTC's Rules and 
Procedures as a condition of their DTC membership.\10\ DTC allows a 
Participant to present Securities to be made eligible for DTC's 
depository and book-entry services. If a Security is accepted by DTC as 
meeting DTC's eligibility requirements for services \11\ and is 
deposited with DTC for credit to the Securities Account of a 
Participant, it becomes an Eligible Security. Thereafter, DTC 
explained, Participants may deposit shares of that Eligible Security 
into their respective DTC accounts. To facilitate book-entry transfers 
and other services that DTC provides for its Participants with respect 
to Deposited Securities, DTC explained that the Deposited Securities 
are generally registered on the books of the Issuer (typically, in a 
register maintained by a transfer agent) in DTC's nominee name, Cede & 
Co. DTC further explained that Deposited Securities that are eligible 
for book-entry services are maintained in ``fungible bulk,'' (i.e., 
each Participant whose Securities of an issue have been credited to its 
Securities Account has a pro rata (proportionate) interest in DTC's 
entire inventory of that issue, but none of the Securities on deposit 
are identifiable to or ``owned'' by any particular Participant).\12\
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    \10\ See supra note 8.
    \11\ See Rule 5, supra note 8; DTC Operational Arrangements 
(Necessary for Securities to Become and Remain Eligible for DTC 
Services), January 2012 (the ``Operational Arrangements''), Section 
1, available at http://www.dtcc.com/~/media/Files/Downloads/legal/
issue-eligibility/eligibility/operational-arrangements.pdf.
    \12\ See Securities Exchange Act Release No. 19678 (April 15, 
1983), 48 FR 17603, 17605, n.5 (April 25, 1983) (describing fungible 
bulk); see also N.Y. Uniform Commercial Code, Sec.  8-503, Off. Cmt 
1 (``. . . all entitlement holders have a pro rata interest in 
whatever positions in that financial asset the [financial] 
intermediary holds'').
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ii. Deposit Chills and Global Locks: Prior Procedures
    According to DTC, previously, upon detecting suspiciously large 
deposits of a thinly traded Eligible Security, DTC imposed or proposed 
to impose a Deposit Chill as a measure to maintain the status quo 
while, pursuant to its Operational Arrangements,\13\ DTC would then 
require the Issuer to confirm by legal opinion of independent counsel 
that the Eligible Security fulfilled the requirements for eligibility. 
DTC explained that the Deposit Chill would be maintained until the 
Issuer provided a satisfactory legal opinion, and that the Deposit 
Chill could remain in place for years, due to an Issuer's non-
responsiveness, refusal, or inability to submit the required legal 
opinion.
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    \13\ See Operational Arrangements, Section I.A, supra note 11.
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    With respect to Global Locks, DTC explained that it previously 
imposed a Global Lock on an Eligible Security when a governmental or 
regulatory authority commenced a proceeding or action alleging 
violations of Section 5 of the Securities Act of 1933, as amended, with 
respect to such Eligible Security. A Global Lock could be released when 
the underlying enforcement action was withdrawn, dismissed on the 
merits with prejudice, or otherwise resolved in a final, non-appealable 
judgment in favor of the defendants allegedly responsible for the 
violations of federal securities laws. However, DTC stated that many 
enforcement actions are only resolved after several years \14\ and 
commonly without any definitive determination of wrongdoing.\15\
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    \14\ See, e.g., SEC v. Kahlon, 12-CV-517 (E.D. Tex., filed 
August 14, 2012); SEC v. Bronson, 12-cv-06421-KMK (S.D.N.Y., filed 
August 22, 2012). As of the date of this filing, neither case has 
been resolved.
    \15\ See, e.g., SEC v. Reiss, 13-cv-01537, dkt no. 10 (S.D.N.Y. 
2014) (issuing a final judgment against the defendant in an 
enforcement action, without the defendant admitting or denying the 
allegations).
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    DTC stated that the above describes, in part, the proposed 
procedures filed by DTC on December 5, 2013,\16\ in response to the 
Commission's opinion and order in In re International Power Group, Ltd. 
(``IPWG'') directing DTC to ``adopt procedures that accord with the 
fairness requirements of Section 17A(b)(3)(H).'' \17\ DTC withdrew the 
proposed rule change on August 18, 2014.\18\
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    \16\ See Securities Exchange Act Release No. 71132 (December 18, 
2013); 78 FR 77755 (December 24, 2013) (SR-DTC-2013-11).
    \17\ See Securities Exchange Act Release No. 66611 (March 15, 
2012), 2012 SEC LEXIS 844 at *32 (March 15, 2012) (Admin. Proc. File 
No. 3-13687).
    \18\ See Securities Exchange Act Release No. 72860 (August 18, 
2014), 79 FR 49825 (August 22, 2014) (SR-DTC-2013-11).
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    According to DTC, as a result of its experiences following the IPWG 
decision and in connection with the previous proposal, DTC has 
determined that its proposed procedures for imposing Deposit Chills and 
Global Locks are more appropriately directed to current trading halts 
or suspensions imposed by the Commission, the Financial Industry 
Regulatory Authority, Inc. (``FINRA''), or a court of competent 
jurisdiction, and therefore

[[Page 62777]]

will be more effective in targeting suspected securities fraud that is 
ongoing at the time the Restriction is imposed. In particular, with 
respect to Deposit Chills imposed pursuant to DTC's previous 
procedures, DTC believed that wrongdoers have seemingly taken into 
account DTC's Restriction process, and have been avoiding it by 
shortening the timeframe in which they complete their scheme, dump 
their shares into the market, and move on to another issue.
    Additionally, DTC stated that Global Locks were typically being 
imposed on the basis of a Commission enforcement action alleging 
securities law violations that had occurred in the past, and so could 
not affect the violative behavior (unless the alleged securities law 
violations were ongoing). According to DTC, by the time of an 
enforcement action, the wrongdoers have long since transferred the 
subject securities. In addition, although a Global Lock bars book-entry 
settlements within DTC, it does not affect the trading of the issue, 
which occurs outside of DTC.

B. Proposed Rule Change

i. Proposed Basis for the Imposition of Restrictions
    Under Sections 1(a) and (b) of the proposed rule change, if either 
FINRA or the Commission halts or suspends trading of an Eligible 
Security, respectively, DTC would impose a Global Lock. Similarly, 
under Section 1(c) of the proposed rule change, DTC would impose a 
Global Lock if ordered to do so by a court of competent jurisdiction. 
DTC states that its facilities should not be available to settle 
transactions otherwise prohibited by the Commission, FINRA, or a court 
of competent jurisdiction. DTC also stated that the imposition of a 
Global Lock on an Eligible Security for which trading is halted or 
suspended would prevent settlement of trades that continue despite the 
halt or suspension, and prevent the liquidation of a halted or 
suspended position through DTC.
    Notwithstanding Sections 1(a) and (b) of the proposed rule change, 
according to DTC, there may be certain limited circumstances where a 
Global Lock would not further the regulatory purpose of such trading 
halt or suspension. Therefore, DTC stated that if it reasonably 
determines that such is the case, DTC may decline to impose a Global 
Lock.
    Finally, under Section 1(d) of the proposed rule change, DTC would 
impose a Restriction when it becomes aware of a need for immediate 
action to avert an imminent harm, injury, or other such material 
adverse consequence to DTC or its Participants that could arise from 
further Deposits of, or continued book-entry services with respect to, 
an Eligible Security. DTC explained that, while it is impossible to 
anticipate all possible scenarios that could give rise to the need for 
action by DTC under Section 1(d) to avoid imminent harm, DTC does not 
anticipate that it would impose Restrictions pursuant to this 
formulation frequently. Examples given by DTC where this provision 
could be invoked include, but are not limited to, if DTC became aware 
that marketplace actors were about to deposit Securities at DTC in 
connection with an ongoing corporate hijacking, market manipulation, or 
in violation of other applicable laws; if an Issuer or its agent 
provides DTC with plausible information that Security certificates were 
stolen and were about to be deposited; or if an Issuer notifies DTC 
that shares of a Security had just been issued erroneously upon a 
conversion of previously satisfied notes.
ii. Proposed Basis for the Release of Restrictions
    As part of DTC's process for imposing Restrictions premised on 
direct court or regulatory agency intervention or the prospect of 
imminent adverse consequences to DTC or its Participants, the proposed 
rule change provided corresponding criteria for releasing such 
Restrictions. In the case of a Global Lock imposed pursuant to Sections 
1(a) and (b) of the proposed rule change (i.e., when either FINRA or 
the Commission issues a trading halt or suspension, respectively), DTC 
proposed that it would release the Global Lock when the halt or 
suspension of trading of the Eligible Security has been lifted. In the 
case of a Restriction imposed pursuant to Section 1(c) of the proposed 
rule change (i.e., an order from a court of competent jurisdiction), 
DTC proposed that it would release the Restriction when a court of 
competent jurisdiction orders DTC to release the Restriction. DTC 
explained that because trading would no longer be prohibited by FINRA, 
the Commission, or a court order, there should not be any settlement 
restrictions, other than those otherwise provided in the Rules.
    In the case of a Restriction imposed pursuant to Section 1(d) of 
the proposed rule change, DTC proposed that it would release the 
Restriction when DTC reasonably determines that the release of the 
Restriction would not pose a threat of imminent adverse consequences to 
DTC or its Participants, obviating the original basis for the 
Restriction. While DTC stated that it is impossible to anticipate all 
possible scenarios that could give rise to a release of a Restriction 
under this basis, DTC anticipated that it would release a Restriction 
imposed pursuant to Section 1(d) of the proposed rule change in a 
number of circumstances, including, without limitation, when DTC 
determined that the perceived harm has passed or is significantly 
remote, when the basis for the Restriction no longer exists, or when an 
Eligible Security had been previously Globally Locked based on a 
Commission enforcement action but there is no indication that illegally 
distributed Securities are about to be deposited.
    Lastly, DTC proposed that it would release a Restriction when DTC 
reasonably determined that its imposition of the Restriction was based 
on a clerical mistake.
iii. Proposed Fair Procedures for Notice of and Opportunity To 
Challenge Restrictions
    Pursuant to the proposed rule change, DTC would send written notice 
(``Restriction Notice'') to the Issuer's last known business address 
and to the last known business address of the Issuer's transfer agent, 
if any, on record with DTC. The Restriction Notice would be sent within 
three Business Days of imposition of a Restriction and would set forth 
(i) the basis for the Restriction; (ii) the date the Restriction was 
imposed; (iii) that the Issuer may submit a written response to DTC 
detailing the basis for release of the Restriction under the proposed 
rule change (``Restriction Response''); and (iv) that the Restriction 
Response must be received by DTC within 20 Business Days of delivery of 
the Restriction Notice. The proposed rule change also provided that, in 
response to the Restriction Response, DTC may reasonably request 
additional information or documentation from the Issuer.
    Once the Restriction Response is received by DTC, the proposed rule 
change provided that it would be reviewed by a DTC officer who did not 
have responsibility for the imposition of the Restriction (``Review 
Officer''). After the Review Officer completes the review, DTC would 
provide a written decision (``Restriction Decision'') to the Issuer. 
Within 10 Business Days of delivery of the Restriction Decision, the 
Issuer may submit a ``Supplement'' for the sole purpose of establishing 
that DTC made a clerical mistake or mistake arising from an oversight 
or omission in reviewing the Restriction Response. If the Issuer 
submits a Supplement, the Review Officer would provide a ``Supplement 
Decision'' within 10

[[Page 62778]]

Business Days after the Supplement was delivered.
    The proposed rule change also provided that the Restriction Notice, 
the Restriction Response, the Restriction Decision, the Supplement, the 
Supplement Decision, and any other documents submitted in connection 
with the proposed procedures would constitute the record for purposes 
of any appeal to the Commission.
    Finally, the proposed rule change clarified that such Rules would 
not affect DTC's ability to (i) lift or modify a Restriction; (ii) 
operationally restrict book-entry services, Deposits, or other services 
in the ordinary course of business, as such restrictions do not 
constitute Deposit Chills or Global Locks for purposes of the proposed 
rule change; (iii) communicate with the Issuer or its transfer agent or 
representative, if any, provided that substantive communications are 
memorialized in writing to be included in the record for purposes of 
any appeal to the Commission; or (iv) send out a Restriction Notice 
prior to the imposition of a Restriction.
iv. Notice of Filing of Amendment No. 1
    As originally proposed, Section 3 of the proposed rule change did 
not provide a specified period of time for the Review Officer to 
complete the review of the Restriction Response and for DTC to issue a 
Restriction Decision. DTC filed Amendment No. 1 to modify Section 3 of 
the proposed rule change to provide that DTC would issue a Restriction 
Decision within 10 Business Days after receiving a Restriction 
Response, which may be extended for a reasonable period of time (i) if 
DTC requests additional information or documents from the Issuer, or 
(ii) by consent of the Issuer or the transfer agent.

III. Summary of Comments Received

    The Commission received eight comment letters in response to the 
proposed rule change.\19\ One comment letter generally supported the 
proposed rule change.\20\ Four comment letters by two commenters, STA 
and Kesner, objected to the proposed rule change.\21\ Two comment 
letters from DTC responded to the objections raised by STA and 
Kesner,\22\ and one comment letter did not specifically comment on any 
aspect of the proposed rule change.\23\
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    \19\ See supra, note 4.
    \20\ See Arnoff Letter.
    \21\ See STA Letters I and II, and Kesner Letters I and II.
    \22\ See DTC Letters I and II.
    \23\ See Deyet Letter.
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A. Supporting Comment

    But for the points that are addressed in footnote 29, below, Arnoff 
fully endorsed the proposed rule change, stating that the proposed fair 
notice and opportunity to challenge procedures would prevent and 
mitigate harm to both issuers and innocent shareholders.\24\
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    \24\ See Arnoff Letter.
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B. Objecting Comments

    STA and Kesner expressed general concerns with DTC, as a monopoly 
in the clearance and settlement of securities, exercising discretion to 
deny access to its services.\25\
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    \25\ STA Letter I at 1; Kesner Letter I at 1. Commenters also 
raised other points about the proposed rule change, but they did not 
explain how those points render the proposed rule change 
inconsistent with the Act. For example, STA stated that (i) the 
proposed rule change was not a ``good faith attempt'' by DTC to 
comply with IPWG, and (ii) any record could not be ``complete'' for 
Commission review if the issuer does not have the ability to compel 
evidence from third parties that may be the cause of DTC's concern 
(STA Letter I at 3); while Kesner stated, for example, that (i) 
DTC's imposition of Restrictions, in many cases, are only based upon 
``flimsy legal footing, notice of commencement of an investigation 
or inquiry, anecdotal observations or even unproven news stories,'' 
(ii) the proposed rule change does not address the ``unfortunate 
results that befall innocents caught up by a [Restriction], nor the 
immensity of the costs and burdens placed on issuers and investors 
seeking to clear a [Restriction],'' and (iii) that the Commission 
has not ``direct[ed] DTC to adopt[] rules to protect DTC or DTC's 
financial institution owners and DTC has not articulated how 
exercising discretionary authority satisfies its obligation for a 
process.'' Kesner Letter I at 2, 3; Kesner Letter II at 1. Because 
these points and other similar points made in the comment letters do 
not raise a legal issue with respect to whether the proposed rule 
change is consistent with the Act, they are not further summarized 
in this notice and order.
    In addition, commenters raised other points beyond the scope of 
the proposed rule change. For example, STA stated that the proposed 
rule change should also apply to transfer agents seeking initial 
access to DTC's facilities (STA Letter I at 4); while Kesner stated, 
for example, that (i) the Commission should not act on the proposed 
rule change without (a) specific comments from major exchanges and 
OTCLink regarding coordination with DTC, and (b) the Commission 
concluding that DTC's actions under the proposed rule change would 
not interfere with the objectives of exchanges and other regulators 
and not hamper the functioning of the markets, (ii) DTC would need 
to give up its immunity from lawsuits in order for there to be a 
potentially fair process in the imposition and appeal of 
Restrictions, (iii) investors should have standing to appeal a 
Restriction, and (iv) the Commission should require DTC to undertake 
a study and submit all of its statistics surrounding Restrictions. 
Kesner Letter I at 4, 6; Kesner Letter II at 3. Similar to Kesner, 
Arnoff asserted that the proposed rule change should clarify that 
DTC should not be immune from civil liability, particularly if DTC 
cannot establish that it acted in good faith and with reasonable 
judgment, because DTC is not acting in a governmental capacity in 
the settlement and clearance process. Arnoff Letter. Moreover, 
Arnoff stated that because DTC is not infallible and the risk of 
error always exists, DTC should be required to purchase ``errors and 
omissions insurance'' to protect innocent issuers and investors and 
to add an ``additional dimension of loss prevention.'' Arnoff 
Letter. Because these points and other similar points made in the 
comment letters are not germane to the proposed rule change and/or 
are beyond the scope of the proposed rule change, they are not 
further summarized in this notice and order.
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Proposed Basis for Imposition of Restrictions Is Vague and 
Discretionary
    STA stated that the proposed rule change suffers from vague, 
ambiguous standards and procedural problems.\26\ Specifically, STA 
asserted that the authority to impose Restrictions under Section 1(d) 
of the proposed rule change is overly broad, arbitrary, permits DTC to 
exercise unfettered discretion, and would allow DTC to take action 
without any real evidence of the likelihood of actual harm or violation 
of objective standards.\27\ STA also asserted that if DTC is concerned 
about imminent adverse consequences to itself or its Participants, it 
should limit its Restriction, under Section 1(d) of the proposed rule 
change, to only a single ten-day period, with any ``fair process'' 
occurring during that ten-day Restriction.\28\ Furthermore, STA states 
that, during the ten-day period, DTC could resolve concerns based on a 
``misunderstanding'' or inform the Commission or FINRA of its concerns, 
allowing either organization to take further action to protect DTC, its 
Participants, or investors from the imminent harm.\29\
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    \26\ STA Letter I at 2; see also STA Letter II at 2.
    \27\ STA Letter I at 1-3; see also STA Letter II at 2.
    \28\ STA Letter I at 3.
    \29\ Id. at 4.
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    Kesner believed that the basis for imposing Restrictions under 
Sections 1(a), (b), and (c) of the proposed rule change is consistent 
with the approach of DTC being directed by a regulator or court.\30\ 
However, similar to STA, Kesner expressed concern that Section 1(d) of 
the proposed rule change would give authority to DTC to impose 
Restrictions merely upon the initiation of an investigation or 
enforcement proceeding where it concludes a threat is imminent 
requiring immediate action.\31\ According to Kesner, DTC cannot be 
``fair'' and cannot satisfy the requirements set forth in IPWG if DTC 
sets its own standards and acts on its own accord to impose a 
Restriction not directed by a traditional regulator or court because 
DTC does not have the resources, technical expertise, or

[[Page 62779]]

``commitment to fairness'' to undertake such an expansive role in the 
substantive regulation of securities Issuers or to become a ``super-
gatekeeper.'' \32\ Rather, the imposition of Restrictions would best be 
left to exchanges and other ``regulatory bodies'' that have sufficient 
resources and could direct DTC to impose a service restriction when 
warranted.\33\ Kesner further stated that DTC's imposition of 
Restrictions under Section 1(d) of the proposed rule change, if 
approved, should include specific methods by which an Issuer can 
successfully appeal and require DTC to remove the chill (or provide for 
automatic removal after a short period) that are fair and reasonable 
and that do not burden smaller Issuers with excessive costs or delays 
during the denial of the DTC's essential services.\34\
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    \30\ Kesner Letter I at 6.
    \31\ Id.
    \32\ Id. at 2, 4-5; see also STA Letter II at 3.
    \33\ Kesner Letter I at 6.
    \34\ Id.
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Proposed Procedures for Notice of and Opportunity To Challenge 
Restrictions Are Not Fair
    STA contended that Section 3, as originally proposed, of the 
proposed rule change is procedurally deficient because there are no 
time periods specified in the proposed rule change for the DTC Review 
Officer's review to be completed. Thus, in some cases Issuers and 
investors could be harmed for an indefinite period while waiting for 
DTC to reach a decision.\35\ Moreover, STA expressed concern that the 
Review Officer tasked with reviewing a Restriction Response may be 
located in an office near the person that imposed the Restriction, may 
have been involved in imposing the Restriction, and may be charged with 
overturning the decision made by a colleague.\36\ Similarly, Kesner 
questioned the independence of the Review Officer and asserted that 
IWPG requires that appeals should be heard by parties independent of 
DTC and suggests that ``representatives of the securities bar, [STA], 
transfer agents, clearing and settlement firms, auditors, and business 
people, under the guidance of the DTC General Counsel, should 
constitute the panel of hearing officers making recommendations for 
imposition and removal of [Restrictions], continuations and appeals 
whenever DTC acts.'' \37\
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    \35\ Id.
    \36\ Id.
    \37\ Kesner Letter II at 2.
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    STA also asserted that notice of a Restriction should occur prior 
to or, at least, contemporaneously with imposition of the Restriction, 
particularly in the case of a Restriction imposed based on DTC's 
assessment of imminent harm, under Section 1(d) of the proposed rule 
change, not three days after the Restriction is imposed.\38\
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    \38\ STA Letter I at 4.
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C. DTC's Response

Response to Comments by STA and Kesner That the Proposed Basis for 
Imposition of Restrictions Is Vague and Discretionary
    In response to STA's comment that the basis for imposition of 
Restrictions under the proposed rule change is vague, DTC asserted that 
Sections 1(a)-(c) of the proposed rule change provided objective 
trigger events for imposing Restrictions and will be the primary focus 
of the Restriction program going forward.\39\ DTC also stated that it 
does not anticipate imposing Restrictions pursuant to Section 1(d) 
frequently \40\ and has provided examples of circumstances under which 
imminent harm could arise in the future as described above.\41\ 
Further, DTC asserted that, STA's position that the Commission should 
not approve the proposed rule change if they include Section 1(d) would 
deny DTC the flexibility to impose Restrictions if necessary to avoid 
imminent harm to DTC or its Participants.\42\ DTC stated that it needs 
the flexibility to protect itself from imminent harm that could arise 
from circumstances that would neither justify nor be impacted by a 
trading halt or suspension.\43\
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    \39\ DTC Letter I at 2.
    \40\ Id. at 2.
    \41\ Id. at 3.
    \42\ Id. at 2.
    \43\ Id. at 3.
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    In response to Kesner's comment that Section 1(d) of the proposed 
rule change would give authority to DTC to impose Restrictions merely 
upon the initiation of an investigation or enforcement proceeding where 
it concludes a threat is imminent requiring immediate action, DTC 
asserted that it is critical to the self-regulatory function of DTC to 
retain discretion to avert imminent harm, including the discretion to 
take action before providing notice to the Issuer, if necessary.\44\ 
Similarly, in response to both STA's and Kesner's comments that 
Restrictions imposed under Section 1(d) of the proposed rule change 
should be automatically removed after a short period or expire after 10 
days, DTC stated that it would not be effective, reasonable, or 
practical for it to premise its proposed rule change on the assumption 
that the Commission or FINRA would or could take action quickly enough 
to protect DTC, its Participants, or investors.\45\ DTC explained 
further that imminent harm to DTC or its Participants could arise from 
circumstances that would not be addressed by or justify a trading halt 
or suspension, such as the impending deposit of illegally distributed 
securities at DTC.\46\ DTC also reiterated that it does not anticipate 
imposing Restrictions pursuant to Section 1(d) frequently.\47\
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    \44\ DTC Letter II at 2.
    \45\ DTC Letter I at 3; see also DTC Letter II at 2.
    \46\ Id.
    \47\ Id.
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Response to Comments by STA and Kesner That the Proposed Procedures for 
Notice of and Opportunity To Challenge Restrictions Are Not Fair
    In response to STA's specific claim that the proposal is 
procedurally deficient because it lacks a stated time period for the 
Review Officer to complete the review, DTC submitted Amendment No. 1 to 
Section 3 of the proposed rule change, which, as described above, 
established a ten-business-day deadline, with limited extension, for 
the Review Officer to complete its review of the Restriction Response 
and DTC provide a Restriction Decision.\48\
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    \48\ Prior to filing Amendment No. 1, DTC also contended in its 
response letter that a reasonable review by the Review Officer in a 
timely manner is implicit in the proposed process, recognizing that 
DTC is bound to perform a prompt review, and to do otherwise may 
conflict with its obligations under Section 17A of the Act. DTC 
Letter I at 4; 15 U.S.C. 78q-1.
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    In response to STA's and Kesner's comments on the independence of 
the Review Officer and STA's comment that notice of a Restriction 
should be at least contemporaneously with the imposition of the 
Restriction, DTC stated that it believes the proposed rule change is 
sufficiently clear to require that the Review Officer not be conflicted 
and that the Review Officer's decision would be unbiased and 
independent,\49\ and that the Commission's decisions in both IPWG and 
In re Atlantis Internet Group (``Atlantis'') \50\ recognize that DTC 
must retain discretion to avert imminent harm, including the discretion 
to take action before providing notice to the issuer, if necessary.\51\
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    \49\ DTC Letter I at 4.
    \50\ Atlantis, Securities Exchange Act Release. No. 75168 at 7-
8, 2015 SEC LEXIS 2394 (June 12, 2015) (Admin. Proc. File No. 3-
15432).
    \51\ DTC Letter I at 3.

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[[Page 62780]]

IV. Proceedings To Determine Whether To Approve or Disapprove SR-DTC-
2016-003, as Modified by Amendment No. 1, and Grounds for Disapproval 
Under Consideration
    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \52\ to determine whether the proposed rule 
change, as modified by Amendment No. 1, should be approved or 
disapproved. Institution of proceedings is appropriate at this time in 
view of the legal and policy issues raised by the proposed rule change. 
As noted above, institution of proceedings does not indicate that the 
Commission has reached any conclusions with respect to any of the 
issues involved. Rather, the Commission seeks and encourages interested 
persons to comment on the proposed rule change, and provide arguments 
to support the Commission's analysis as to whether to approve or 
disapprove the proposed rule change.
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    \52\ 15 U.S.C. 78s(b)(2)(B).
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    Pursuant to Section 19(b)(2)(B) of the Act,\53\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
The Commission is instituting proceedings to allow for additional 
analysis of the proposed rule change's consistency with the Act and the 
rules thereunder. Specifically, the Commission believes that DTC's 
proposed rule change raises questions as to whether it is consistent 
with: (i) Section 17A(b)(3)(F) of the Act,\54\ which requires, in part, 
that clearing agency rules be designed to assure the safeguarding of 
securities in the custody or control of the clearing agency and, in 
general, protect investors and the public interest; and (ii) Section 
17A(b)(3)(H) of the Act,\55\ which requires clearing agency rules to be 
in accordance with the provisions of Section 17A(b)(5)(B) of the Act, 
and, in general, provide a fair procedure with respect to the 
prohibition or limitation by the clearing agency of any person with 
respect to access to services offered by the clearing agency.\56\ 
Section 17A(b)(5)(B) of the Act \57\ requires that, in any proceeding 
by a registered clearing agency to determine whether a person shall be 
denied participation or prohibited or limited with respect to access to 
services offered by the clearing agency, the clearing agency shall 
notify such person of, and give him an opportunity to be heard upon, 
the specific grounds for denial or prohibition or limitation under 
consideration and keep a record.\58\ A determination by the clearing 
agency to deny participation or prohibit or limit a person with respect 
to access to services offered by the clearing agency shall be supported 
by a statement setting forth the specific grounds on which the denial 
or prohibition or limitation is based.\59\
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    \53\ 15 U.S.C. 78s(b)(2)(B).
    \54\ 15 U.S.C. 78q-1(b)(3)(F).
    \55\ 15 U.S.C. 78q-1(b)(3)(H).
    \56\ 15 U.S.C. 78q-1(b)(3)(H).
    \57\ 15 U.S.C. 78q-1(b)(5)(B).
    \58\ Id.
    \59\ Id.
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V. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
changes to the proposed rule change as set forth in Amendment No. 1, as 
well as any others they may have identified with the proposed rule 
change, as amended. In particular, the Commission invites the written 
views of interested persons concerning whether the proposed rule 
change, as modified by Amendment No. 1, is consistent with Sections 
17A(b)(3)(F) and 17A(b)(3)(H) of the Act, or any other provision of the 
Act, or the rules and regulations thereunder.
    Interested persons are invited to submit written data, views, and 
arguments on or before October 3, 2016. Any person who wishes to file a 
rebuttal to any other person's submission must file that rebuttal on or 
before October 17, 2016. 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 email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2016-003 on the subject line.

Paper Statements

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

All submissions should refer to File Number SR-DTC-2016-003. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of DTC and on DTCC's 
Web site (http://dtcc.com/legal/sec-rule-filings.aspx). 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-2016-003 and should be 
submitted on or before October 3, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\60\
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    \60\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21802 Filed 9-9-16; 8:45 am]
 BILLING CODE 8011-01-P