Document ID: SEC-2015-1244-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Depository Trust Co.
Posted Date: 2015-07-24T04:00Z

[Federal Register Volume 80, Number 142 (Friday, July 24, 2015)]
[Notices]
[Pages 44178-44179]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-18135]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75487; File No. SR-DTC-2015-007]

Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving Proposed Rule Change Regarding the Discontinuance of 
the Distribution of Fractional Shares in Respect of Corporate Actions 
for New Issues in DTC's System

July 20, 2015.

I. Introduction

    On May 27, 2015, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2015-007 pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to discontinue the option offered by DTC to 
issuers that allows for the distribution of fractional shares of 
securities in DTC's system, when DTC is handling fractional 
dispositions of shares resulting from corporate actions, for new 
issues, as more fully described below. The proposed rule change was 
published for comment in the Federal Register on June 8, 2015.\3\ The 
Commission did not receive comment letters regarding the proposed 
change. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 75094 (June 2, 2015), 80 
FR 32425 (June 8, 2015) (File No. SR-DTC-2015-007).
---------------------------------------------------------------------------

II. Description of the Proposed Rule Change

    The following is a description of the proposed rule change, as 
provided by DTC:
    DTC's purpose with the proposed rule change is to discontinue the 
option offered by DTC to issuers that allows for the distribution of 
fractional shares of securities in DTC's system, when DTC is handling 
fractional dispositions of shares resulting from corporate actions, for 
new issues, as more fully described below.\4\
---------------------------------------------------------------------------

    \4\ Terms not otherwise defined herein have the meaning set 
forth in the DTC Rules and Procedures (``DTC Rules''), available at 
http://www.dtcc.com/legal/rules-and-procedures.aspx.
---------------------------------------------------------------------------

Background

    When a securities issue is made eligible at DTC, DTC has offered 
three options to the issuer for handling the disposition of fractional 
shares in DTC's system resulting from a corporate action for the issue. 
The issuer may: (i) Round up to the next full share or drop fractions, 
(ii) pay ``cash-in-lieu'' of fractional shares, or (iii) issue the 
fractional shares into an identifying number (``Fractional 
Identifier'') generated by DTC.\5\ The assets comprising the 
disposition of fractional shares, whether in the form of shares or 
cash, once received from the issuer's transfer or paying agent, are 
credited by DTC in proportional amounts to the respective accounts of 
Participants depending on the amount shares of the issue they have on 
deposit. Participants then distribute credits on their own books, as 
applicable, to their customers that hold beneficial interests in those 
shares.
---------------------------------------------------------------------------

    \5\ The Fractional Identifier generated for the third option 
above has been separate from the CUSIP[supreg] identifier 
(``CUSIP'') that is universally recognized by the marketplace.
---------------------------------------------------------------------------

    The first two options for handling the disposition of fractional 
shares are specified in the DTC Distributions Service Guide (``Guide'') 
\6\ and DTC's Operational Arrangements (``OA'').\7\ Distributions of 
fractional shares in DTC's system under the third option are delivered 
to Participants in accordance with the provisions of DTC Rule 6 that 
are applicable to DTC services related to Deposited Securities.\8\
---------------------------------------------------------------------------

    \6\ See the Guide, p. 31, available at http://www.dtcc.com/~/
media/Files/Downloads/legal/service-guides/
Distributions%20Service%20Guide%20FINAL%20November%202014.pdf.
    \7\ See the OA, p. 31, available at http://www.dtcc.com/~/media/
Files/Downloads/legal/issue-eligibility/eligibility/operational-
arrangements.pdf.
    \8\ See DTC Rules (Rule 6 (Services)), p. 45, available at 
http://www.dtcc.com/~/media/Files/Downloads/legal/rules/
dtc_rules.pdf.
---------------------------------------------------------------------------

Proposal

    Fractional shares are not tradable. The distribution of fractional 
shares in respect of corporate actions reduces efficiencies for 
investors in an issue, including with respect to the value and 
transferability of assets delivered, as investors are required to wait 
for an extended period for the aggregation of fractional shares into a 
full share that may be traded. Tracking, processing and reporting of 
fractional shares separately from the associated CUSIP, which are 
necessitated by this process, increases costs to DTC and the industry.
    In order to improve efficiencies for investors and reduce costs for 
DTC and the industry, DTC has proposed to discontinue the option for 
issuers to distribute any fractional shares for new issues into DTC's 
system. DTC will continue to allow issuers undergoing a corporate 
action with a choice between:

[[Page 44179]]

(i) the rounding up and dropping of fractions, and (ii) the payment of 
cash-in-lieu of fractional shares. DTC will maintain the Fractional 
Identifiers previously designated for existing fractional shares within 
DTC, and continue to perform corporate actions processing with respect 
to those Fractional Identifiers.

Implementation

    The effective date of the proposed rule change will be announced 
via a DTC Important Notice.

III. Discussion and Commission Findings

    Section 19(b)(2)(C) of the Act \9\ directs the Commission to 
approve a proposed rule change of a self-regulatory organization if it 
finds that such proposed rule change is consistent with the 
requirements of the Act and rules and regulations thereunder applicable 
to such organization. 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, as well as, in general, protect investors and the public 
interest.\10\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(2)(C).
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    The Commission finds the proposed rule change consistent with the 
Act. More specifically, the Commission finds that the proposed rule 
change is consistent with section 17A(b)(3)(F) of the Act.\11\ By 
eliminating the distribution of fractional shares for new issues within 
DTC's system, the proposed rule change should, as represented by DTC, 
improve efficiencies for investors relating to the disposition of 
fractional shares in corporate-action events, as well as reduce the 
costs for DTC and the industry relating to DTC tracking, processing and 
reporting on separate Fractional Identifiers for those issues, 
consistent with the provisions of section 17A(b)(3)(F) of the Act which 
require that the rules of the clearing agency be designed, among other 
things, to promote the prompt and accurate clearance and settlement of 
securities transactions, as well as, in general, to protect investors 
and the public interest.\12\
---------------------------------------------------------------------------

    \11\ Id.
    \12\ Id.
---------------------------------------------------------------------------

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of section 17A of the Act \13\ and the 
rules and regulations thereunder.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that proposed rule change SR-DTC-2015-007 be, and hereby is, 
approved.\14\
---------------------------------------------------------------------------

    \14\ 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.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-18135 Filed 7-23-15; 8:45 am]
 BILLING CODE 8011-01-P