Document ID: SEC-2008-1201-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2008-09-02T04:00Z

[Federal Register: September 2, 2008 (Volume 73, Number 170)]
[Notices]               
[Page 51326-51328]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr02se08-80]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58404; File No. SR-DTC-2008-08]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Eliminate the Ability To 
Obtain a Physical Certificate From DTC for Issues That Are Eligible and 
Participating in the Direct Registration System

August 21, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on July 9, 2008, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') proposed rule change No. SR-DTC-
2008-08. The Commission is publishing this notice to solicit comments 
from interested parties on the proposed rule change as described in 
Items I, II, and III below, which items have been prepared primarily by 
the DTC.\2\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ The exact text of the DTC's proposed rule change can be 
found at http://www.dtcc.com/legal/rule_filings/dtc/2008.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC is proposing to amend its Withdrawal-by-Transfer (``WT'') 
service to eliminate the ability of participants to receive physical 
certificates for securities positions withdrawn from participants' 
accounts at DTC when the issue of such securities is eligible and 
participating in the Direct Registration System.

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

    In its filing with the Commission, the 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 these 
statements.\3\
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    \3\ The Commission has modified portions of the text of the 
summaries prepared by the DTC.
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A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Over the last four decades, securities ownership has evolved from 
investors holding physical certificates to evidence their ownership to 
investors having book-entry positions. The Direct Registration System 
(``DRS'') was implemented in support of an industry initiative to 
eliminate physical certificates in equity securities, paralleling the 
evolution of book-entry form of ownership in other investment 
instruments, such as mutual funds, treasury and government agency 
securities, municipal bonds, and options. DRS permits an investor to 
hold a securities position in book-entry form on the books of the 
issuer rather than in certificated form or indirectly through a 
financial intermediary in street name. DRS allows an investor to 
transfer at any time his or her DRS position from the issuer to a 
financial intermediary or vice versa through the facilities of DTC. 
Additionally, an investor holding a DRS position may obtain a physical 
certificate if the issuer provides for the issuance of certificates.\4\
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    \4\ For more information on DRS, see 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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[[Page 51327]]

    In 2003, the Securities Industry and Financial Markets Association 
(``SIFMA''), which was formerly the Securities Industry Association, 
took the lead in lobbying state legislatures, particularly Delaware, to 
eliminate the requirement for companies to issue certificates and to 
allow companies the option of issuing securities in book-entry form. As 
a result of this industry initiative, all states now allow for equity 
ownership in book-entry form.\5\ U.S. exchanges have also adopted new 
listing rules that require all exchange-listed securities to be 
eligible to participate in DRS.\6\ Today there are over 7,500 issues 
eligible to participate in DRS with more than 375 issues no longer 
offering investors the option of receiving a physical certificate. 
Industry representatives estimate that investors hold approximately 
forty million \7\ book-entry accounts on the records of the issuers or 
their transfer agents.
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    \5\ Puerto Rico is currently the only jurisdiction requiring 
equity securities to be certificated.
    \6\ Securities Exchange Act Release Nos. 54290 (August 8, 2006), 
71 FR 47262 (August 16, 2006) [File No. SR-Amex-2006-40]; 54289 
(August 8, 2006), 71 FR 47278 (August 16, 2006) [File No. SR-NYSE-
2006-29]; 54288 (August 8, 2006), 71 FR 47276 (August 16, 2006) 
[File No. SR-NASDAQ-2006-008]; and 54410 (September 7, 2006), 71 FR 
54316 (September 14, 2006) [File No. SR-NYSEArca-2006-31].
    \7\ Based on a SIFMA webinar held on June 24, 2008.
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    Currently, DTC participants (i.e., broker-dealers and banks) use 
the Withdrawal-by-Transfer (``WT'') service to instruct DTC to 
reregister securities assets in the participant's account in the name 
of an individual investor, a firm, or a third party name. The 
reregistered assets can be issued in certificate form or in a DRS 
position. On receipt of a WT instruction from a participant, DTC either 
(i) sends a certificate to the issuer or the issuer's transfer agent 
for reregistration in the name of the person or entity identified in 
the WT instruction or (ii) instructs the issuer or the issuer's 
transfer agent to debit DTC's position and issue securities in the name 
of the person or entity identified in the WT instruction.
    WT volumes at DTC have decreased from 27,000 daily transactions in 
1980 to approximately 1,200 daily transactions to date in 2008. Eighty-
eight percent (88%) of all WTs submitted by participants involve DRS 
eligible issues. Due primarily to participants' voluntary change in 
their firm policies of ``defaulting to DRS'' (i.e., requesting a DRS 
statement rather than a physical certificate for their customers), 
approximately forty-one percent (41%) of all WTs submitted in May 2008 
were processed as DRS positions, rather than as physical certificates. 
This trend away from certificate issuance is expected to continue 
throughout 2008.
    As part of DTC's response to the financial services industry's 
initiative to achieve ``straight-through processing'' of securities 
transactions, which is based in part on the elimination of physical 
certificates in the U.S. market,\8\ DTC began a program of steadily 
increasing its fees for WTs as a disincentive to use of physical 
certificates.\9\
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    \8\ For more information on straight through processing and 
dematerialization initiatives, see Securities Exchange Act Release 
No. 49405 (March 11, 2004), 69 FR 12922 (March 18, 2004) [File No. 
S7-13-04].
    \9\ DTC charges approximately $125.00 per transaction for a WT 
instruction requesting a physical certificate for an issue 
participating in DRS and $6.00 per transaction for a WT instruction 
requesting a DRS position.
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    In an effort to further reduce the industry's dependency on 
physical certificates, DTC is proposing to eliminate the issuance of 
physical certificates through its WT service for issues that are 
participating in DRS. DTC believes the modification of its WT service 
reaffirms its goals of reducing the costs and risk associated with 
processing physical certificates.
    Pursuant to the proposed rule change, beginning January 1, 2009, 
DTC would no longer permit participants to request the issuance of a 
certificate on a WT instruction if the issue is participating in DRS. 
Instead, DTC would instruct the issuer or its transfer agent to 
establish a DRS position and provide a DRS statement in lieu of a 
physical certificate for all issues that are participating in DRS.\10\ 
An investor or the investor's custodian will still be able to obtain a 
physical certificate by taking the investor's DRS statement directly to 
the issuer or its transfer agent for conversion to a certificate or by 
using DTC's Deposit and Withdrawal at Custodian (``DWAC'') process.\11\
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    \10\ Issues that participate in the DRS program allow investors 
to hold their assets in DRS book-entry form on the books of the 
issuer.
    \11\ DWAC is a method of electronically transferring shares 
between participants and the transfer agent as custodian. For more 
information about the DWAC service, see Securities Exchange Act 
Release No. 30283 (January 23, 1992), 57 FR 3658 (January 30, 1992) 
[File No. SR-DTC-91-16] (order granting approval of the DWAC 
service).
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    The rule change also proposes on or after July 1, 2009, to 
eliminate a participant's ability to obtain a physical certificate 
through the WT service for issues eligible but not participating in DRS 
on or after July 1, 2009 (``elimination date''). For the small number 
of issues that have not become eligible to participate in DRS by the 
elimination date, WT instructions requesting a physical certificate may 
continue to be processed through DWAC or Rush WT processes.
    Additionally, the rule change is proposing to eliminate DTC's 
Direct Mail by the Depository (``DMD'') service for all issues in the 
fourth quarter of 2009. As a result, DTC would no longer mail 
certificates to investors or their third parties. Participants would 
still be able to use the Direct Mail by Agent (``DMA'') service, in 
which transfer agents provide DRS statements or physical certificates 
to investors or their appointed third parties. Physical certificates 
could also be obtained through DTC's Central Delivery processes in 
which DTC mails the physical certificates in bulk to the participant or 
allows the participant to pick up the certificate.
2. Statutory Basis
    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act, as amended,\12\ and the rules 
and regulations thereunder because the proposed rule change will 
promote the prompt and accurate clearance and settlement of securities 
transactions by modifying a DTC service in order to reduce the inherent 
risks associated with physical certificates.
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    \12\ 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 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

    DTC 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

[[Page 51328]]

    (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-DTC-2008-08 in the subject line.

Paper Comments

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

All submissions should refer to File Number SR-DTC-2008-08. 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, on official business days between the hours 
of 10 a.m. and 3:30 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of the DTC and on 
the DTC's Web site, http://www.dtcc.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-DTC-2008-08 and should be submitted on 
or before September 23, 2008. For the Commission by the Division of 
Trading and Markets, pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-20249 Filed 8-29-08; 8:45 am]

BILLING CODE 8010-01-P