Document ID: SEC-2008-1544-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2008-11-18T05:00Z

[Federal Register: November 18, 2008 (Volume 73, Number 223)]
[Notices]               
[Page 68465-68467]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18no08-124]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58910; File No. SR-DTC-2008-07]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change To Implement 
Processing Enhancements to the Profile Modification System Used in the 
Direct Registration System

November 6, 2008.

I. Introduction

    On July 7, 2008, The Depository Trust Company (``DTC'') filed with 
the

[[Page 68466]]

Securities and Exchange Commission (``Commission'') a proposed rule 
change 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 August 11, 2008.\2\ No comment letters were received. 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. 58292 (August 1, 2008), 
73 FR 46693 (August 11, 2008) [File No. SR-DTC-2008-07].
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II. Description

    As the use of the Direct Registration System (``DRS'') continues to 
grow, attention has centered on reducing the number of rejected 
instructions submitted through the Profile Modification System 
(``Profile''), a facility administered by DTC that allows an investor's 
DRS position to be transferred from the records of the transfer agents 
\3\ to a broker-dealer and vice versa. In order to effectively transfer 
an investor's securities position using Profile, the broker-dealer DTC 
participant must enter into Profile an instruction containing certain 
identifying criteria of the investor, such as share quantity and a 
taxpayer identification number (``TIN'') or Social Security Number. If 
the submitted information does not match the information the DRS 
Limited Participant (i.e., the transfer agent) has on its file, the 
Profile instruction is rejected, which may result in a rejection fee 
assessed by the DRS Limited Participant. More importantly, the 
rejection can also result in delays in transferring the position, which 
could possibly cause financial harm to an investor.
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    \3\ Transfer agents must be designated as DRS Limited 
Participants by DTC in order to facilitate DRS instructions through 
Profile.
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    Today, nearly 25% of all Profile instructions are rejected by the 
transfer agents. The two most common reasons for rejections are the 
Profile instruction not matching the share quantity or the investor's 
TIN or Social Security number on the transfer agent's records. The DRS 
Ad Hoc Committee, an industry committee established to address 
operational issues related to DRS, believes that by implementing 
certain system and processing improvements, about 7,000 Profile 
rejections per month could potentially be eliminated.

A. Proposed Changes to Profile

    In an effort to decrease the number of rejections in Profile, DTC 
will make the following enhancements to Profile functionality.
    Move All Instruction. Currently, Profile requires a participant to 
enter a specific share quantity or dollar value (in the case of debt) 
in its Profile instruction. Under the rule change, a participant 
submitting an instruction in Profile will be allowed to select one of 
the following options: (1) Enter a specific share quantity or dollar 
value; (2) ``move all'' of the investor's whole shares \4\ to the 
requesting participant's account at DTC; (3) ``move all'' of the 
investor's whole shares to the requesting participant's account at DTC, 
liquidate any fractional share positions remaining in the account at 
the transfer agent, and have the cash proceeds mailed directly to the 
investor; (4) ``move all'' of the investor's whole shares to the 
requesting participant's account at DTC, liquidate any fractional share 
positions remaining in the account at the transfer agent, have the cash 
proceeds mailed directly to the investor, and close the investor's DRS 
and Dividend Reinvestment Plan (``DRIP'') account.\5\ By using the 
``move-all'' functionality, participants can forgo referencing a 
specific share quantity in the Profile instruction, which DTC believes 
should eliminate a major cause of Profile rejections.\6\
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    \4\ DTC's systems only process and allow whole shares to be 
processed and held in participants' accounts at DTC. They do not 
accommodate fractional shares.
    \5\ Some transfer agents maintain separate investor accounts for 
DRIP shares and DRS positions. The participant's instruction through 
Profile to close the account would require a DRS Limited Participant 
to close both the DRIP and the DRS account.
    \6\ Although DRS Limited Participants are able to enter Profile 
instructions to move DRS positions from a broker-dealer's account at 
DTC to the investor's account on the books of the transfer agent, 
the proposed rule change will not permit the ``move all'' function 
in Profile to be available to the DRS Limited Participant at this 
time.
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    Dual TIN or Social Security Numbers. Currently, participants are 
permitted to enter only one TIN or Social Security number in its 
Profile instruction. Under the rule change, participants may elect to 
submit a Profile instruction with two TINs or Social Security numbers 
instead of one. The option to submit a Profile instruction with two TIN 
or Social Security numbers may be necessary, for example, where the 
investor's account is a joint account. For those Profile instructions 
with two TINs or Social Security Numbers, the transfer agent will only 
need to match on one of the TIN or Social security numbers on the 
Profile instruction to the its records for the investor account.
    The rule change will require broker-dealers and transfer agents 
that process their DRS transactions through a direct electronic 
computer-to-computer link with DTC to make internal system enhancements 
to accommodate DTC's changes to Profile.\7\ Specifically, internal 
systems will need to be enhanced so that they are able to accept DRS 
Profile instructions to ``move all'' shares from the investor's account 
at the transfer agent to the investor's broker-dealer's account at DTC. 
They will also need to be enhanced to provide for the processing of a 
Profile instruction with a second TIN/Social Security Number.
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    \7\ It is anticipated that for those users that communicate 
Profile instructions through DTC through a dedicated terminal (PTS 
or PBS), they will only need to update their internal procedures and 
workflow.
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B. Proposed Remuneration

    Pursuant to the new rule, broker-dealers will be required to pay 
transfer agents two types of remuneration: (1) Reimbursement to 
compensate for the initial system development of the enhancements 
contemplated under the move-all proposal and (2) a transaction fee to 
pay for the on-going administration of the proposed new functions. 
Accordingly, broker-dealers will pay for seventy-five percent of all 
system costs with a maximum payment of $200,000 per transfer agent for 
project plans submitted by transfer agents to DTC by September 1, 2008. 
For project plans that will be managed by a third party vendor, broker-
dealers will be required to pay a remuneration based on the vendor's 
total project cost. DTC will act as a conduit to collect and distribute 
the remuneration from the broker-dealers to transfer agents.
    Under the ``move all'' proposal, transfer agents were required to 
submit a project plan to DTC by September 1, 2008, and should be ready 
to implement the ``move all'' Profile functionality by November 1, 
2008, in order to be eligible to receive the system cost remuneration. 
DTC will make a one time payment to eligible transfer agents no later 
than ninety calendar days after the completion of the move all and dual 
TIN or Social Security Number functionality going live. DTC will 
collect a surcharge of $1.00 from broker-dealers for no more than 
twenty-four calendar months for each Profile transaction submitted by a 
broker-dealer in order to offset the up-front remuneration made by DTC 
to transfer agents. DTC will eliminate the surcharge at the end of 
twenty-four calendar months or sooner if the total amount of up-front 
remuneration paid by DTC is collected before the twenty-four month 
period has expired.
    DTC will also charge broker-dealers $.75 per Profile transaction to 
offset the transfer agents' on-going costs of

[[Page 68467]]

supporting the ``move all'' function. The transaction fee will be 
adjusted annually to reflect DRS Profile transactional volume changes. 
The rule change will require transfer agents that wish to receive a 
transaction fee to have submitted their project plan by September 1, 
2008. The transfer agents represented on the DRS Ad Hoc Committee have 
agreed that the remunerations from the transactional fee will be no 
more than $25,000 per year per transfer agent. DTC will pay each 
eligible transfer agent with 2,000 or more Profile transactions monthly 
a set monthly amount of $2,080, or $24,960 annually. DTC will pay each 
eligible transfer agent with at least 200 transactions monthly but less 
than 2,000 transactions monthly a set monthly amount of $800, or $9,600 
annually. DTC will not pay transfer agents with less than 200 
transactions a month.

C. DRS Limited Participant Eligibility Requirements

    DTC will amend its DRS Limited Participant rules to require 
transfer agents to be able to process Profile instructions requesting 
the ``move all'' options and instructions including dual TIN or Social 
Security Numbers. To maintain eligibility as a DRS Limited Participant, 
all current DRS Limited Participants must provide ``move all'' and dual 
TIN or Social Security number processing capability by no later than 
December 31, 2008.

III. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions, to remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions, and, in general, to protect investors and the public 
interest.\8\ The rule change is consistent with the provisions of the 
Act because it improves efficiency and reduces risks in DRS.
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    \8\ 15 U.S.C. 78q(b)(3)(F).
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    Accordingly, for the reasons stated above the Commission finds that 
the rule change, is consistent with DTC's obligation under Section 17A 
of the Act to promote the prompt and accurate clearance and settlement 
of securities transactions, to foster cooperation and coordination with 
persons engaged in the clearance and settlement of securities 
transactions, to remove impediments to and perfect the mechanism of a 
national system for the prompt and accurate clearance and settlement of 
securities transactions, and, in general, to protect investors and the 
public interest.

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-2008-07) be and hereby 
is approved.\9\
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    \9\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Practices, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-27278 Filed 11-17-08; 8:45 am]

BILLING CODE 8011-01-P