Document ID: SEC-2011-0465-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2011-04-11T04:00Z

[Federal Register Volume 76, Number 69 (Monday, April 11, 2011)]
[Notices]
[Pages 20061-20062]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-8553]

[[Page 20061]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64191; File No. SR-DTC-2010-15]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change To Amend Rules 
Relating to the Requirement To Maintain a Balance Certificate in the 
Fast Automated Securities Transfer Program

April 5, 2011.

I. Introduction

    On November 5, 2010, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2010-15 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 November 23, 2010.\2\ The 
Commission received two comment letters.\3\ For the reasons discussed 
below, the Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 63320 (November 16, 
2010), 75 FR 71473 (November 23, 2010).
    \3\ Letters from Charles V. Rossi, President, Securities 
Transfer Association (December 14, 2010) and Candice Fordin, 
Associate Counsel, The Depository Trust & Clearing Corporation 
(February 22, 2011).
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II. Description

    Under DTC's FAST program, transfer agents participating in FAST 
(``FAST transfer agents'') hold DTC securities in the form of balance 
certificates.\4\ The balance certificates are registered in the name of 
DTC's nominee, Cede & Co., and evidence the record ownership by Cede & 
Co. of each issue for which the FAST transfer agent acts as transfer 
agent. The Balance Certificate Agreement is executed by each FAST 
transfer agent and DTC and sets forth the rights and obligations of 
FAST transfer agents and DTC. As additional securities are deposited or 
withdrawn from DTC, the appropriate FAST transfer agent adjusts the 
denomination of the balance certificate and electronically confirms 
theses changes with DTC.
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    \4\ FAST reduces the movement of certificates between DTC and 
transfer agents, thereby reducing the costs and risks associated 
with the creation, movement, and storing of certificates. For a 
description of DTC's current rules relating to FAST, see Securities 
Exchange Act Release Nos. 34-13342 (March 8, 1977) (File No. SR-DTC-
76-3); 34-14997 (July 26, 1978) (File No. Sr-DTC-78-11); 34-21401 
(October 16, 1984) (File No. SR DTC-84-8); 34-31941 (March 3, 1993) 
(SR-DTC-92-15); and 34-46956 (December 2, 2002) (File No. SR-DTC 
2002-15). In addition, see Securities Exchange Act Release No. 34-
60196 (June 30, 2009) 74 FR 33496 (File No. SR-DTC-2006-16).
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    Because transfer agents electronically confirm with DTC the 
adjustments to the denomination of the balance certificates and 
balances with DTC on a daily basis the number of shares represented by 
the balance certificate, some FAST transfer agents requested that DTC 
remove the requirement that they custody a balance certificate. As a 
result, DTC has proposed to remove the requirement that FAST transfer 
agents maintain a balance certificate for only those securities whose 
issuers are ``participating'' in the direct registration system 
(``DRS'').\5\
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    \5\ DRS allows registered owners to hold their assets on the 
records of the transfer agent in book-entry form rather than in 
certificated form and provides investors with an alternate approach 
to holding their securities either in certificated form or in 
``street'' name. Securities on deposit at DTC are considered ``DRS 
eligible'' if the issuer's by-laws permit the issuance of book entry 
shares and the CUSIP number has been designated as FAST eligible by 
DTC. ``Participating in DRS'' means that the issuer and its transfer 
agent have complied with DTC's requirements to participate in the 
DRS program and actually allow investors to hold shares in DRS. 
Issuers that participate in DRS have acknowledged that the use of 
electronic registration of securities is a valid method to evidence 
ownership of their issued securities.
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    Accordingly, pursuant to the rule change being approved by this 
Order, DTC will remove the requirement that FAST transfer agents 
maintain a balance certificate for those exchange listed issues that 
are DRS eligible and that are participating in DRS. However, DTC will 
continue to reserve its rights to draw down from the FAST balance and 
to receive in lieu of a DRS position a certificate registered in DTC's 
nominee name of Cede & Co. and reflecting any number of shares up to 
and including the total amount of shares due DTC from the FAST transfer 
agents.

III. Comment Letters

    The Commission received two comment letters, one from the 
Securities Transfer Association (``STA'') raising several concerns 
about the filing and the other from DTC responding to the STA's 
comments.\6\ While the STA strongly supports DTC's proposed rule to 
eliminate the requirement for FAST agents to maintain a balance 
certificate for issues participating in DRS, the STA believes the 
requirement to maintain a balance certificate should also be eliminated 
for those issues eligible for DRS but not participating. The STA 
reasons that DRS eligible issues can be electronically reflected on the 
transfer agent's records and can still be moved electronically through 
a Deposit Withdrawal at Custodian transaction (``DWAC'').\7\ The STA 
also noted that the proposed requirement that reserves the right for 
DTC to request a certificate may be problematic for those issuers that 
do not issue certificates.
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    \6\ Supra note 3.
    \7\ Through DTC's DWAC service, participants are permitted to 
make deposits and withdrawals directly with a transfer agent for an 
issue evidenced by a balance certificate registered in the name of 
Cede & Co. and held for DTC by a transfer agent. Issues eligible 
under DTC's Fast Automated Securities Transfer (``FAST'') are 
eligible for DTC's DWAC service. For more information about the DWAC 
service, see Securities Exchange Act Release No. 30283 (January 23, 
1992), 57 FR 3658 (January 30, 1992) (SR-DTC-91-16).
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    DTC's comment letter responded to both concerns raised by the STA. 
First, DTC contended that companies that have issued securities that 
are fully eligible and participating in DRS have authorized the use of 
a statement to evidence ownership. Without this authorization by the 
issuer, DTC argues, there is no ability to get an electronic statement 
from the issuer's transfer agent and therefore no inherent approval of 
statement form as a valid evidence of ownership.\8\
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    \8\ In addition to the requirement that an issue be eligible and 
participating in DRS, DTC's proposed rule change also requires that 
issue be exchange traded. The STA did not raise any concerns in its 
comment letter regarding this aspect of the proposal. Nonetheless, 
DTC stated in its comment letter that by waiving the requirement to 
maintain a balance certificate for only those issues that are listed 
on an exchange, DTC is able to rely on the due diligence of the 
exchange to provide a level of issuer transparency that DTC might 
not otherwise be able to attain.
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    Second, with regards to the provision of DTC's proposal reserving 
the right for DTC to request a certificate, DTC maintained that 
currently all issuers eligible and participating in DRS are required to 
maintain and provide DTC upon request a FAST balance certificate. DTC 
stated that it cannot anticipate every situation that may arise where 
it is in DTC's best interest to certificate the FAST balance but there 
are times when obtaining a certificate is necessary, such as when the 
issuer's transfer agent or the issuer itself no longer meets the 
criteria to be in the FAST program.

IV. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to assure the safeguarding 
of securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.\9\ The Commission finds 
that DTC's proposed rule change is consistent with its obligations 
under the Exchange Act because it should allow DTC to reduce the costs 
and risks associated with the creation, storage, transfer, and

[[Page 20062]]

replacement of physical certificates, specifically in this case the 
balance certificates, which should in turn allow DTC to better 
safeguard the securities which are in its custody or control or for 
which it is responsible.
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    \9\ 15 U.S.C. 78q-1(b)(3)(F).
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    While the Commission understands the STA would like to further 
promote dematerialization by eliminating the need for FAST agents 
acting for issues that are eligible but not participating in DRS to 
maintain a balance certificate, we agree with DTC that at this time 
allowing only those issues where the issuer has expressly provided that 
statements are evidence of ownership to eliminate maintaining the 
balance certificate better safeguards the securities being custodied by 
the FAST agent on DTC's behalf. Furthermore, the proposed rule change 
may encourage those issuers that have made their securities eligible 
but are not participating in DRS to participate in DRS, which would 
further facilitate the STA's goal of reducing the use of physical 
certificates.
    With regards to the STA's concern that requiring issuers or their 
transfer agents to provide a balance certificate upon request, the 
proposed rule change does not change DTC's current requirements 
relating to certificating FAST balance positions and therefore should 
not present any new issues for issuers or FAST transfer agents. DTC was 
simply making clear in the proposed rule change that it is continuing 
to reserve the right to request such a certificate.
    Accordingly, for the reasons stated above the Commission believes 
that the proposed rule change is consistent with DTC's obligation under 
Section 17A of the Exchange Act, as amended, and the rules and 
regulations thereunder.\10\
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    \10\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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IV. 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 17A 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-DTC-2010-15) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-8553 Filed 4-8-11; 8:45 am]
BILLING CODE 8011-01-P