Document ID: SEC-2008-1712-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2008-12-22T05:00Z

[Federal Register: December 22, 2008 (Volume 73, Number 246)]
[Notices]
[Page 78411-78412]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22de08-141]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59102; File No. SR-DTC-2008-11]

Self-Regulatory Organizations; The Depository Trust Company;
Order Approving a Proposed Rule Change To Implement a New Service To
Allow Issuers To Track and Limit the Number of Beneficial Owners for an
Individual CUSIP

 December 15, 2008.

I. Introduction

    On August 6, 2008, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') a proposed
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Act'').\1\ On September 5, 2008, the Commission published
notice of the proposed rule change in the Federal Register to solicit
comments from interested persons.\2\ The Commission received one
comment letter in response to the proposed rule change.\3\ For the
reasons discussed below, the Commission is approving the proposed rule
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 58436 (Aug. 27, 2008),
73 FR 51870.
    \3\ Letter from Brent Welke, CEO, Agnova Corporation (Sept. 8,
2008).
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II. Description

    The rule change provides for the implementation of a new service
that will allow issuers, either themselves or through an issuer-
designated administrator, to track and limit the number of beneficial
owners of their privately transacted and closely held securities. This
service will be called the Security Holder Tracking Service (``SH
Tracking Service'').
    The SH Tracking Service will facilitate the book-entry settlement
and asset servicing for securities that are privately transacted and
closely held by providing a tool for issuers and their agents to
monitor and limit the number and character (e.g., qualified
institutional buyers or ``QIBs'') of beneficial owners of its
securities (``Tracked Securities'').\4\ Although the SH Tracking
Service was developed to address the specific concerns of Rule 144A
securities,\5\ in practice DTC envisions that it could be utilized for
other types of securities for which the number or character of the
beneficial owners requires some level of control.
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    \4\ Issuers must control the number of beneficial owners
pursuant to certain registration and reporting requirements. In
order for issuers to be able to avoid the periodic reporting
requirements required by the Act, they must not have more than 500
beneficial owners. 15 U.S.C. 78l(g), 15 U.S.C. 78m(a), 15 U.S.C.
78o(d).
    \5\ 17 CFR 230.144A.
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    The eligibility process for a Tracked Security to be made and
remain DTC-eligible will not change from DTC's current process.
However, under the new system, DTC will be requested in writing to set
up a specific CUSIP for tracking such securities \6\ and will be
notified who will perform the function of the issuer's administrator
for the CUSIP in the SH Tracking Service.\7\ Upon receipt of all of
such documentation, DTC will make the CUSIP DTC-eligible and will
activate the tracking indicator on its security master file.
Additionally, once it is made eligible, DTC will perform asset
servicing for the issue.
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    \6\ DTC anticipates that this instruction will come from the
underwriter at the time of the initial distribution at DTC.
    \7\ DTC anticipates that the issuer's transfer agent will serve
as its administrator.
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    The issuer's administrator will control movements of the particular
CUSIP for which it had been appointed. Once the tracking indicator has
been activated on the master file and the Administrator has been
appointed, no transfer of the securities will take place in the Tracked
Security without the approval of the administrator through DTC's
Inventory Management System (``IMS''). The administrator, based on
requirements of the issuer, will be solely responsible for determining
whether a transaction should be effected in DTC. Once approved by the
administrator, DTC will perform centralized book-entry settlement. IMS
will only allow an administrator access to view and approve
transactions for CUSIPs for which it had been appointed administrator
as reflected in DTC's records.
    Because DTC is relying solely on the instructions of the
administrator in order to effect settlement in Tracked Securities and
will have no knowledge of the number or character of the underlying
beneficial owners, use of the SH Tracking Service by any party will
constitute an agreement that DTC shall not be liable for any loss or
damages related to the use of the SH Tracking System. Each user of the
SH Tracking Service must agree to indemnify and hold harmless DTC and
its affiliates from and against any and all losses, damages,
liabilities, costs, judgments, charges, and expenses arising out of or
relating to the use of the SH Tracking Service.
    The Tracked Securities will not be held as part of a participant's
general free account and will not be considered eligible collateral in
DTC's settlement system.
    To recover the costs of building the SH Tracking Service, DTC will
add the following fees to its Fee Schedule:
     $25,000 per CUSIP for SH Tracking Services;
     $5 per delivery and receive for Tracked Securities;
     $5 per receive and delivery for reclaims of Tracked
Securities.

III. Comment Letter

    Brent Welke, CEO of Agnova Corporation, wrote that, in the context
of the settlement cycle, ``DTCC (sic) [should be] strictly liable for
double ownership repercussions'' and that ``DTCC (sic) stockholders
[should] jointly and severally guarantee DTCC obligations.'' Finally,
Mr. Welke expressed concern about ``brokers who are facilitating share
counterfeiting.''

[[Page 78412]]

IV. Discussion

    The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to DTC. In particular, the Commission believes
the proposal is consistent with Section 17A(b)(3)(F) of the Act,\8\
which requires that the rules of a registered clearing agency are
designed to, among other things, promote the prompt and accurate
clearance and settlement of securities transactions. DTC's creation of
a service to assist issuers and their agents fulfill their regulatory
obligations to monitor and limit the number of beneficial shareholders
of their closely held securities should provide a meaningful incentive
for issuers and participants to utilize DTC's depository services,
which should provide more efficient processing of such transactions by
reducing the incidence of physical processing outside of DTC.
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    \8\ 15 U.S.C. 78q-1(b)(3)(F).
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    The Commission duly notes the importance of the issue of short
selling that the commenter appeared to be expressing and will continue
to monitor developments in this area and assert its oversight
responsibilities of industry participants with the view to ensure that
appropriate safeguards are in place to facilitate the prompt and
accurate clearance and settlement of securities transactions and to
protect investors. However, that issue is outside the scope and purpose
of this proposed rule change, which is to implement a service to allow
issuers of closely held securities to enhance their compliance with
federal securities laws.

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 Section 17A of the Act \9\ and the rules and regulations
thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-DTC-2008-11) be and
hereby is approved.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 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 Markets,
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-30322 Filed 12-19-08; 8:45 am]

BILLING CODE 8011-01-P