Document ID: SEC-2006-1187-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes NYSE Arca, Inc.
Posted Date: 2006-09-14T04:00Z

[Federal Register: September 14, 2006 (Volume 71, Number 178)]
[Notices]               
[Page 54316-54318]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14se06-69]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54410; File No. SR-NYSEArca-2006-31]

 
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Granting 
Approval of a Proposed Rule Change Amending Rules to Mandate Listed 
Companies Become Eligible To Participate in a Direct Registration 
System

September 7, 2006.

I. Introduction

    On June 19, 2006, NYSE Arca, Inc. (``NYSE Arca'') filed with the 
Securities and Exchange Commission (``Commission'') proposed rule 
change SR-NYSEArca-2006-31 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 July 18, 2006.\2\ One comment 
letter was received.\3\ For the reasons discussed below, the Commission 
is granting approval of the proposed rule change.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54126 (July 11, 2006), 
71 FR 40768 (July 18, 2006) [File No. SR-NYSEArca-2006-31].
    \3\ Letter from Loren K. Hanson, Director of Investor Relations, 
to Nancy M. Morris, Secretary, Commission (August 15, 2006).
    \4\ The Commission has also granted approval to similar rule 
changes submitted by the New York Stock Exchange LLC (``NYSE''), 
American Stock Exchange LLC (``Amex''), and The NASDAQ Stock Market 
LLC (``Nasdaq''). Securities Exchange Act Release Nos. 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-2006-08]; and 54290 (August 8, 2006), 71 FR 47262 (August 16, 
2006) [File No. SR-Amex-2006-40].
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II. Description

    The Direct Registration System (``DRS'') allows an investor to 
establish either through the issuer's transfer agent or through the 
investor's broker-dealer a book-entry position on the books of the 
issuer and to electronically transfer her position between the transfer 
agent and the broker-dealer of her choice through a facility currently 
administered by The Depository Trust Company (``DTC'').\5\ DRS, 
therefore, enables an investor to have securities registered in her 
name on the books of the issuer without having a securities certificate 
issued to her and to electronically transfer her

[[Page 54317]]

securities to her broker-dealer in order to effect a transaction 
without the risk and delays associated with the use of securities 
certificates.
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    \5\ Currently, the only registered clearing agency operating a 
DRS is DTC. For a detailed 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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    Investors holding their securities in DRS retain the rights 
associated with securities certificates, including such rights as 
control of ownership and voting rights, without having the 
responsibility of holding and safeguarding securities certificates. In 
addition, in corporate actions such as reverse stock splits and 
mergers, cancellation of old shares and issuance of new shares are 
handled electronically with no securities certificates to be returned 
to or received from the transfer agent.
    In order to reduce the number of transactions in securities for 
which settlement is effected by the physical delivery of securities 
certificates and thereby reduce the risks, costs, and delays associated 
with the physical delivery of securities certificates, 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 be in the DRS operated by DTC. 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 
requirements of new NYSE Arca Rule 7.62(c), the new rule will provide 
issuers with the option of using another qualified DRS if they so 
desire if one should exist in the future.
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    \6\ The exact text of the NYSE Arca proposed new Rule 7.62(c) 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, DTC rules require that 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. In addition, NYSE Arca has 
been notified that some issuers may need to amend their corporate 
governing documents, such as their certificates of incorporation or 
their by-laws, before they can make their securities DRS eligible.
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    \8\ 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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    To allow sufficient time for any such necessary actions, NYSE Arca 
will 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, Rule 7.62(c) will 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.\9\ 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.
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    \9\ The securities that 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. 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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III. Comment Letters

    The Commission received one comment opposing the proposed rule 
change.\10\ The commenter, speaking on behalf of an issuer that acts as 
its own transfer agent but works with a large commercial transfer agent 
that acts as co-transfer agent, expressed concern the proposed rule 
change would eliminate the issuer's role as transfer agent. The 
commenter believes that there can be only one transfer per company 
registered with DTC under the current DRS model, and since the issuer 
is not a DRS Limited Participant, its co-transfer agent would survive 
as the issuer's only transfer agent. The commenter believes that 
implementation of NYSE Arca's proposed rule would be a detriment 
because shareholders would not receive the quality of service from a 
commercial transfer agent that they currently receive from the issuer 
acting as its own transfer agent. Furthermore, this commenter contends 
that forcing companies to implement DRS is unproductive and costly 
because issuers will have to amend their bylaws and articles of 
incorporation to allow for book-entry positions even when the issuer 
intends to continue to issue stock certificates.
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    \10\ Supra note 3. But see comment letters to similar rule 
changes submitted by the New York Stock Exchange LLC (``NYSE''), 
American Stock Exchange LLC (``Amex''), and The NASDAQ Stock Market 
LLC (``Nasdaq''). Securities Exchange Act Release Nos. 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-2006-08]; and 54290 (August 8, 2006), 71 FR 47262 (August 16, 
2006) [File No. SR-Amex-20].
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IV. Discussion

    Section 6(b)(5) of the Act requires, among other things, that the 
rules of an exchange be 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.\11\ For the reasons described below, the Commission finds 
that NYSE Arca's rule change is consistent with Section 6(b)(5) of the 
Act.
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    \11\ 15 U.S.C. 78f(b)(5).
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    The use of securities certificates has long been identified as an 
inefficient and risk-laden mechanism by which to hold and transfer 
ownership.\12\ Because securities certificates require manual 
processing, their use can result in significant delays and expenses in 
processing securities transactions and present the risk of certificates 
being lost, stolen, or forged. Many of these costs and risks are 
ultimately borne by investors.\13\ Congress has recognized the problems 
and dangers that the use of certificates presents to the safe and 
efficient operation of the U.S. clearance and settlement system and has 
given the Commission responsibility and authority to address these 
issues.\14\
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    \12\ Securities Exchange Act Release No. 49405 (March 11, 2004), 
69 FR 12922 (March 18, 2004), [File No. S7-13-04] (Securities 
Transaction Settlement Concept Release).
    \13\ Id.
    \14\ 15 U.S.C. 78q-1(a)(2)(A). Congress expressly envisioned the 
Commission's authority to extend to all aspects of the securities 
handling process involving securities transactions within the United 
States, including activities by clearing agencies, depositories, 
corporate issuers, and transfer agents. See S. Rep. No. 75, 94th 
Cong., 1st Sess. at 55 (1975).
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    Consistent with its Congressional directives and in its efforts to 
improve efficiencies and decrease risks associated with processing 
securities

[[Page 54318]]

transactions, the Commission has long advocated a reduction in the use 
of certificates in the trading environment by immobilization or 
dematerialization of securities and has encouraged the use of 
alternatives to holding securities in certificated form. Among other 
things, the Commission has approved the rule filings of self-regulatory 
organizations that require their members to use the facilities of a 
securities depository for the book-entry settlement of all transactions 
in depository-eligible securities \15\ and that require any security 
listed for trading must be depository eligible if possible.\16\ More 
recently the Commission has approved the implementation and expansion 
of DRS.\17\
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    \15\ Securities Exchange Act Release No. 32455 (June 11, 1993), 
58 FR 33679 (June 18, 1993) (order approving rules requiring 
members, member organizations, and affiliated members of the New 
York Stock Exchange, National Association of Securities Dealers, 
American Stock Exchange, Midwest Stock Exchange, Boston Stock 
Exchange, Pacific Stock Exchange, and Philadelphia Stock Exchange to 
use the facilities of a securities depository for the book-entry 
settlement of all transactions in depository-eligible securities 
with another financial intermediary).
    \16\ Securities Exchange Act Release No. 35798 (June 1, 1995), 
60 FR 30909 (June 12, 1995), [File Nos. SR-Amex-95-17; SR-BSE-95-09; 
SR-CHX-95-12; SR-NASD-95-24; SR-NYSE-95-19; SR-PSE-95-14; SR-PHLX-
95-34] (order approving rules setting forth depository eligibility 
requirements for issuers seeking to have their shares listed on the 
exchange).
    \17\ In 1996, the NYSE modified its listing criteria to permit 
listed companies to issue securities in book entry form provided 
that the issue is included in DRS. Securities Exchange Act Release 
No. 37937 (November 8, 1996), 61 FR 58728 (November 18, 1996), [File 
No. SR-NYSE-96-29]. Similarly, the NASD modified its rule to require 
that if an issuer establishes a direct registration program, it must 
participate in an electronic link with a securities depository in 
order to facilitate the electronic transfer of the issue. Securities 
Exchange Act Release No. 39369 (November 26, 1997), 62 FR 64034 
(December 3, 1997), [File No. SR-97-51]. On July 30, 2002, the 
Commission approved a rule change proposed by the NYSE to amend NYSE 
Section 501.01 of the NYSE Listed Company Manual to allow a listed 
company to issue securities in a dematerialized or completely 
immobilized form and therefore not send stock certificates to record 
holders provided the company's stock is issued pursuant to a 
dividend reinvestment program, stock purchase plan, or is included 
in DRS. Securities Exchange Act Release No. 46282 (July 30, 2002), 
67 FR 50972 (August 6, 2002), [File No. SR-NYSE-2001-33].
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    While the U.S. markets have made great progress in immobilization 
and dematerialization for institutional and broker-to-broker 
transactions, many industry representatives believe that the small 
percentage of securities held in certificated form (mostly by retail 
customers of broker-dealers) impose unnecessary risk and 
disproportionately large expense to the industry and to investors. In 
an attempt to address this issue, NYSE Arca's rule change, along with 
those of the NYSE, Amex, and Nasdaq, should help expand the use of DRS. 
As a result, risks, costs, and processing inefficiencies associated 
with the physical delivery of securities certificates should be 
reduced, and impediments to the perfection of the national market 
system should be reduced. Additionally, those investors holding 
securities in listed securities covered by the rule change that decide 
to hold their securities in DRS should realize the benefits of more 
accurate, quicker, and more cost-efficient transfers; faster 
distribution of sale proceeds; reduced number of lost or stolen 
certificates and a reduction in the associated certificate replacement 
costs; and consistency of owning in book-entry across asset classes.
    The Commission realizes that some issuers and transfer agents may 
bear expenses related to complying with the rule change. In order to 
make an issue DRS-eligible, issuers of listed companies must have a 
transfer agent which is a DRS Limited Participant and may need to amend 
their corporate governing documents to permit the issuance of book-
entry shares. The Commission believes, however, that the long-term 
benefits of increased efficiencies and reduced costs and risks afforded 
by DRS outweigh the costs that some issuers and transfer agents may 
incur. Furthermore, the time frames built into the proposal should 
allow issuers and their transfer agents sufficient time to make any 
necessary changes to comply with the rule change.
    While the proposed rule change should significantly reduce the 
number of transactions in securities for which settlement is effected 
by the physical delivery of securities certificates, the proposed rule 
change will not eliminate the ability of investors to obtain securities 
certificates provided the issuer has chosen to issue certificates. Such 
investors can continue to contact the issuer's transfer agent, either 
directly or through their broker-dealer, to obtain a securities 
certificate.
    The commenter's concern that its role as an issuer transfer agent 
will be eliminated because there can be only one transfer agent per 
issue registered with DTC under the current DRS model is unfounded. DTC 
has procedures in place to permit a named transfer agent, which in this 
case would be the issuer, to file notice with DTC as the primary 
transfer agent but use a co-transfer agent for its DRS functions.
    Accordingly, for the reasons stated above the Commission finds that 
the rule change is consistent with NYSE Arca's obligation under Section 
6(b) of the Act 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.

V. 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 6(b)(5) 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-NYSEArca-2006-31) be and hereby is approved.
    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).

J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E6-15229 Filed 9-13-06; 8:45 am]

BILLING CODE 8010-01-P