Document ID: SEC-2009-0946-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2009-07-13T04:00Z

[Federal Register: July 13, 2009 (Volume 74, Number 132)]
[Notices]               
[Page 33496-33503]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jy09-141]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60196; File No. SR-DTC-2006-16]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change as Amended Relating 
to FAST and DRS Limited Participant Requirements for Transfer Agents

June 30, 2009.

I. Introduction

    On October 12, 2006, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2006-16 pursuant to Section 19(b)(1) of the 
Securities Exchange Act

[[Page 33497]]

of 1934 (``Act'').\1\ On March 29, 2007, and May 3, 2007, DTC filed 
amendments to the proposed rule change. On May 25, 2007, the Commission 
published notice of the proposed rule change as amended by Amendment 1 
and Amendment 2.\2\ On December 31, 2007, DTC again filed an amendment. 
Notice of the amended proposal was published in the Federal Register on 
February 20, 2007.\3\ On June 23, 2008, DTC again filed an amendment. 
Notice of the amended proposed rule change was published in the Federal 
Register on June 19, 2008.\4\ The Commission received 47 comment 
letters in total to the proposed rule change.\5\ For the reasons 
discussed below, the Commission is granting approval of the proposed 
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 55816 (May 25, 2007), 71 
FR 30648 (June 1, 2007).
    \3\ Securities Exchange Act Release No. 57362 (February 20, 
2008), 73 FR 10849 (February 28, 2008).
    \4\ Securities Exchange Act Release No. 57959 (June 12, 2008), 
73 FR 57959 (June 19, 2008).
    \5\ Infra note 22. The comment letters can be found at http://
www.sec.gov/comments/sr-dtc-2006-16/dtc200616shtml.
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II. Description

    Prior to the establishment of DTC's Fast Automated Securities 
Transfer program (``FAST''), transfers of securities to or from DTC on 
behalf of its participants occurred by sending securities certificates 
back and forth between DTC and transfer agents. In the case of 
securities being deposited with DTC, DTC sent the certificates received 
by its participants to the transfer agent for registration into the 
name of DTC's nominee, Cede & Co., and the transfer agent returned the 
reregistered certificates to DTC. In the case of securities being 
withdrawn from DTC, DTC sent the certificates registered in the name of 
Cede & Co. to the transfer agent for reregistration into the name 
designated by the withdrawing participant, and the transfer agent 
returned a reregistered security certificate to DTC for delivery to the 
withdrawing participant or delivered the reregistered security 
certificate to another entity as directed and sent a security 
certificate to DTC representing the remainder of DTC's position. The 
process of physically transporting securities certificates between DTC 
and transfer agents exposed DTC, its participants, and the transfer 
agents to the risk of loss during transit and resulted in significant 
expenses.
    DTC's FAST program was designed to eliminate some of the risks and 
costs related to this production and transportation of securities 
certificates. Under the FAST program, transfer agents hold FAST 
eligible securities in the name of Cede & Co. for the benefit of 
DTC.\6\ As additional securities are deposited or withdrawn from DTC, 
transfer agents adjust the size of DTC's position as appropriate and 
electronically confirm theses changes with DTC. Transfer agents acting 
as ``FAST agents'' are holding in custody for DTC those securities that 
would otherwise be held at DTC. As such, the FAST program reduces the 
movement of certificates between DTC and the transfer agents and 
therefore reduces the costs and risks associated with the creation, 
movement, and storing of certificates for issuers, transfer agents, 
broker-dealers, and DTC.
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    \6\ For a description of DTC's current rules relating to FAST, 
refer to Securities Exchange Act Release Nos. 13342 (March 8, 1977) 
[File No. SR-DTC-76-3]; 14997 (July 26, 1978) [File No. SR-DTC-78-
11]; 21401 (October 16, 1984) [File No. SR-DTC-84-8]; 31941 (March 
3, 1993) [SR-DTC-92-15]; and 46956 (December 6, 2002) [File No. SR-
DTC-2002-15].
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    The FAST program has grown substantially since first being 
introduced in 1975.\7\ Recently all the major securities exchanges have 
made changes to the listing requirements to require companies to make 
their securities eligible to participate in the Direct Registration 
System (``DRS'').\8\ Because FAST eligibility is a prerequisite to an 
issue being eligible for DRS, DTC expects that the number of FAST 
eligible securities will continue to expand.\9\ Furthermore, because 
being a FAST agent is a criterion for a transfer agent's eligibility 
for participation in DRS, DTC anticipates significant growth in the 
number of FAST agents.\10\
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    \7\ DTC introduced the FAST program in 1975 with 400 issues and 
10 agents. Currently, there are over 930,000 issues and 
approximately 90 agents in FAST.
    \8\ DRS provides an investor with the ability to register her 
securities in her own name on the issuer's records and to 
efficiently transfer by book-entry movements her securities 
positions to her broker-dealer rather than holding a physical 
certificate or holding indirectly through a financial intermediary 
(e.g., a broker-dealer) in ``street name.'' DRS also allows for the 
transfer of a DRS position from the books of the issuer to the 
account of a DTC broker-dealer participant and vice versa through 
the facilities of DTC using FAST.
    \9\ Securities Exchange Act Release Nos. 54289 (August 8, 2006), 
71 FR 47278 (August 16, 2006) [File No. SR-NYSE-2006-29]; 54290 
(August 8, 2006), 71 FR 47262 (August 16, 2006) [File No. SR-Amex-
2006-40]; 54288 (August 8, 2006), 71 FR 47276 (August 16, 2006) 
[File No. SR-NASDAQ-2006-08]; 54410 (September 7, 2006), 71 FR 54316 
(September 14, 2006) [File No. SR-NYSE Arca-2006-31]; 55482 (March 
15, 2007), 72 FR 13547 (March 22, 2007) [File No. SR-Phlx-2006-69]; 
55481 (March 15, 2007), 72 FR 13546 (March 22, 2007) [File No. SR-
CHX-2006-33]; and 55480 (March 15, 2007), 72 FR 13544 (March 22, 
2007) [File No. SR-BSE-2006-46].
    \10\ For a description of DTC's rules relating to DRS, see 
Securities Exchange Act Release Nos. 37931 (November 7, 1996) [File 
No. SR-DTC-96-15]; 41862 (September 10, 1999) [File No. SR-DTC-99-
16]; 42366 (January 28, 2000) [File No. SR-DTC-00-01]; 42704 (April 
19, 2000) [File No. SR-DTC-00-04]; 43586 (November 17, 2000) [File 
No. SR-DTC-00-09]; 44969 (August 14, 2001) [File No. SR-DTC-2001-
07]; 45232 (January 3, 2002) [SR-DTC-2001-18]; 45430 (February 11, 
2002) [File No. SR-DTC-2002-01]; 48885 (December 5, 2003) [File No. 
SR-DTC-2002-17]; and 52422 (September 14, 2005) [File No. SR-DTC-
2005-11].
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    As a result of discussions with industry representatives, including 
transfer agents, broker-dealers, issuers, insurance companies, and 
various industry associations, DTC amended its filing four times in 
order to address concerns with the various proposals. The provisions 
contained in DTC's proposed rule change, as amended by the four 
amendments, are the provisions discussed in this order.

(1) Amendments to DTC's FAST Requirements

    Despite the FAST program's robust past growth and expected future 
growth, the transfer agent eligibility requirements for FAST have not 
substantially changed since the implementation of FAST in 1975 and do 
not: (i) Take into account the increased volume and value of securities 
processed by the transfer agents, (ii) reflect improved technology and 
currently available safeguards that could enhance the safekeeping of 
securities held by the transfer agents on behalf of DTC, and (iii) 
require the use of standardized audit reports addressing transfer 
agents' processes and controls.
    In light of the FAST program's growth, DTC re-examined the transfer 
agent eligibility requirements of the FAST program with a view toward 
ensuring that DTC's assets in the custody of transfer agents, which 
ultimately belong to DTC's participants and their customers, are 
adequately protected. As more fully described below, DTC has identified 
aspects of these FAST eligibility requirements that need revising or 
additional components. The revisions and additional requirements 
include: (i) Insurance requirements that take into account the level of 
transaction volumes of securities processed by transfer agents, (ii) 
safekeeping requirements to clarify and to enhance security and fire 
protection standards and to take into consideration technological 
advances that allow for economical security improvements, and (iii) 
bookkeeping requirements to ensure compliance with applicable laws and 
regulations and

[[Page 33498]]

standardized audit reports addressing transfer agents' processes and 
controls.
    DTC is therefore amending and restating the minimum requirements 
for transfer agents' participation in the FAST program in order to 
improve the safekeeping of securities that transfer agents hold for DTC 
and to provide improved safekeeping requirements as more transfer 
agents participate in the immobilization and dematerialization of 
securities. DTC's revised minimum requirements are as follows.
    1. The transfer agent must be registered with the Commission or its 
appropriate regulatory authority, except where the transfer agent's 
participation in the FAST program is limited to acting solely for 
municipal issues or unlisted corporate debt issues (transfer agents 
must provide DTC with evidence of such limited use), and must follow 
all applicable rules under the Exchange Act and all other applicable 
Federal and State laws, rules, and regulations applicable to transfer 
agents, including OFAC regulations.
    2. The transfer agent must execute and fulfill the requirements of 
the appropriate form of ``Balance Certificate Agreement'' \11\ with 
DTC.\12\
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    \11\ DTC currently maintains three forms of the Balance 
Certificate Agreement: One for transfer agents, one for issuers 
acting as their own agent, and one for parties using a processing 
agent. DTC is consolidating these forms into a single form, as 
attached as Exhibit 2 to its initial filing.
    \12\ DTC notes that these minimum requirements incorporate by 
reference the Balance Certificate Agreement between the transfer 
agent and DTC.
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    3. The transfer agent must sign and fulfill requirements of the 
``Operational Criteria for the FAST Transfer Agent Processing'' \13\ 
and must comply with all applicable provisions of DTC's ``Operational 
Arrangements'' (``OA''),\14\ as amended from time to time.\15\
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    \13\ The ``Operational Criteria for the FAST Transfer Agent 
Processing'' is attached as Exhibit 2(b) to DTC's initial filing.
    \14\ For more information relating to DTC's OA, refer to 
Securities Exchange Act Release Nos. 45994 (May 29, 2002), 67 FR 
39452 [File No. SR-DTC-2002-02]; 24818 (August 19, 1987), 52 FR 
31833 [File No. DTC-87-10]; 25948 (July 27, 1988), 53 FR 29294 [File 
No. DTC-88-13]; 30625 (April 23, 1992), 57 FR 18534 [File No. DTC-
92-06]; 35649 (April 26, 1995), 60 FR 21576 [File No. DTC-94-19]; 
and 39894 (April 21, 1998), 63 FR 23310 [File No. DTC-97-23].
    \15\ DTC notes that these minimum requirements incorporate by 
reference the ``Operational Criteria for FAST Transfer Agent 
Processing'' and all applicable terms in DTC's ``Operational 
Arrangements.''
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    4. In order to provide for the operational proficiency and 
efficiency of the program, the transfer agent must complete DTC's 
training on FAST functionality on being accepted as a FAST transfer 
agent.
    5. In order to protect against the risk of loss, the transfer agent 
must carry and provide evidence to DTC of a minimum of the following 
standard form Financial Institution Bond or a commercial crime policy 
providing similar coverage in proportion to transaction volume the 
agent processes, as follows:
    a. $10 million for a transfer agent with 25,000 or fewer transfer 
transactions per year as reported to the Commission;
    b. $25 million for a transfer agent with over 25,000 transfer 
transactions per year as reported to the Commission; and
    c. In addition, the transfer agent must carry and provide evidence 
to DTC of a minimum of $1 million in Errors and Omissions insurance.
    In the event that a transfer agent can demonstrate to DTC that its 
existing coverage and/or capitalization would provide similar 
protections to DTC as the requirements set forth above, it may apply to 
DTC for a waiver. DTC shall have sole discretion as to whether or not 
to grant any such waiver.
    6. In order to facilitate consistent protection against losses 
relating to securities in the transfer agent's control, the transfer 
agent must notify DTC as soon as practicable of notice of any actual 
lapse in insurance coverage or change in business practices, such as 
increasing volumes or other business changes, that would result in the 
transfer agent requiring additional insurance coverage as outlined 
above. Such notice shall be delivered to:

DTC, Inventory Management--1SL, 55 Water Street, New York, New York 
10041.

    A copy of such notice shall also be delivered to:

DTC, General Counsel's Office, 55 Water Street--22nd Floor, New York, 
New York 10041.

    7. The transfer agent must provide proof to DTC of any new or 
substitute policy with respect to any required insurance within five 
(5) days after the entry into force of such new or substitute policy.
    8. The transfer agent must establish and maintain electronic 
communications with DTC that enable FAST positions to be balanced on a 
daily schedule.
    9. The transfer agent must provide to DTC on an annual basis within 
ten (10) business days of filing with the Commission, a copy of the 
Annual Study of Evaluation of Internal Accounting Control filed with 
the Commission pursuant to Exchange Act Rule 17Ad-13. If a transfer 
agent obtains a SAS-70 audit report, the transfer agent shall provide 
DTC with a copy of the report within ten (10) business days of the 
transfer agent's receipt of the report.
    10. FAST agents must safeguard all the securities assets as 
required by Exchange Act Rule 17Ad-12 and with at a minimum the 
following additional DTC requirements:
    a. Maintenance of a theft and fire central monitoring alarm system 
protecting the entire premises and
    b. Maintenance of all certificates in a vault, safe, or other 
secure location, which is accessible only by authorized personnel.
    11. Personnel with access to the vault, safe, or other secure 
location and the codes for the centralized monitoring system must 
comply with Exchange Act Rule 17f-2, which includes but is not limited 
to rules for fingerprinting staff that physically handle certificates.
    12. Unless prohibited by applicable law, the transfer agent when 
applying to be a FAST agent must provide DTC with a copy of the two 
most recent compliance or deficiency correspondences from the 
Commission as well as any follow-up correspondences. In addition, 
unless prohibited by applicable law, the transfer agent on an ongoing 
basis must provide DTC with notice of any alleged material deficiencies 
documented by the Commission that may affect the activities of the 
transfer agent as a FAST Agent within five (5) business days of the 
transfer agent being notified of such deficiencies.\16\
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    \16\ DTC agrees to establish and maintain any and all such 
safeguards as are necessary and appropriate to protect the 
confidentiality of any notices, correspondences, or reports from the 
Commission to the transfer agent, and any follow-up correspondences, 
that the transfer agent provides to DTC. DTC also agrees that any 
information obtained from these notices, correspondences, or reports 
will not be used for any reason other than the intended purposes as 
authorized by this order and will not be shared with any person or 
entity outside of DTC. DTC will also notify the Commission if these 
documents are required to be remitted by DTC to any other federal or 
state authority.
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    13. Unless prohibited by applicable law, during regular business 
hours and upon advance notice, DTC reserves the right to visit and 
inspect, to the extent such visits and inspections pertain to DTC's 
securities position, the transfer agent's facilities, books, and 
records. DTC, however, is not obligated to conduct such visits or 
inspections.
    14. Existing FAST agents shall have a period of six (6) months from 
the date of the Commission's approval of this rule filing to comply 
with these requirements, including the submission to DTC of a signed 
Balance Certificate Agreement, signed Operational Criteria, and all 
supporting documentation referenced herein. If an agent is not 
compliant with these requirements upon the expiration of such period, 
DTC

[[Page 33499]]

shall have the right, using its sole discretion, to terminate or to 
continue the transfer agent's status as a FAST agent.
    15. An agent acting on behalf of a transfer agent shall have the 
same rights and responsibilities under these requirements as if it were 
the transfer agent.

(2) Amended and Restated Eligibility Requirements for DRS Limited 
Participants

    DTC is revising the eligibility requirements for DRS Limited 
Participants \17\ and the eligibility requirements for DRS issues to 
promote consistency with the FAST program requirements as well as to 
further ensure the soundness of the DRS system.
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    \17\ DRS Limited Participants are transfer agents that 
participate in DRS through DTC. They are bound to certain provisions 
of the DTC rules. Securities Exchange Act Release No. 37931 
(November 7, 1996) [File No. SR-DTC-96-15].
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    In order to be eligible to be a DRS Limited Participant, a transfer 
agent must:
    1. Participate in the FAST program and abide by DTC's requirements 
governing participation in the FAST program;
    2. Execute a DTC Limited Participant Account agreement;
    3. Deliver transaction advices directly to investors relating to 
DRS Withdrawal-by-Transfer requests and provide DTC with a file 
containing the information required by DTC (which must include, among 
other things, the transaction delivery date) in a format and using the 
functionality as specified by DTC from time to time;
    4. Complete DTC's training program on DRS and Profile Modification 
System (``Profile'') functionality;
    5. Participate in the Profile surety or insurance program; \18\
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    \18\ In DRS, instructions to transfer shares are sent by a 
broker-dealer that is a DTC participant or by a transfer agent that 
is a DRS Limited Participant through Profile. Profile provides 
screen based indemnification against false instructions from the 
party submitting the instructions through DRS. The indemnity is 
supported by either a surety bond or an insurance policy.
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    6. Implement program changes related to DTC internal systems 
modifications within a reasonable time upon receiving notification from 
DTC of such modifications; and
    7. Implement program changes to support and expand DRS processing 
capabilities as agreed to by the DRS Ad Hoc Committee.
    Existing DRS Limited Participants shall have a period of six (6) 
months from the date of the Commission's approval of this rule filing 
within which they must comply with these requirements. If an agent is 
not compliant with these requirements upon the expiration of such 
period, DTC shall have the right using its sole discretion to terminate 
or to continue the agent's status as a DRS Limited Participant.

 (3) Eligibility Requirements for DRS Issues

    In order for an issue to be eligible as a DRS issue, the issue 
must:
    1. Have a transfer agent accepted as a DTC DRS Limited Participant 
and
    2. Be included in the FAST program.\19\
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    \19\ An issue may not become a DRS issue if an ``out of 
balance'' position exists. An ``out of balance'' position occurs 
when DTC's records indicating Cede & Co.'s ownership position do not 
match the transfer agent's records indicating Cede & Co.'s ownership 
position.
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(4) DTC's Proposed Standard of Care Obligations With Respect to FAST

    DTC is also clarifying the responsibilities and liabilities of FAST 
agents with respect to their participation in the FAST program. DTC 
believes that historically the Commission has left to user-governed 
clearing agencies the question of how to allocate losses associated 
with, among other things, clearing agency functions.\20\ In conjunction 
with its approval of DTC's rule filing whereby DTC adopted a uniform 
standard of responsibility with respect to certain of its services, the 
Commission noted that while it had ``called on registered clearing 
agencies to undertake, by rule, to deliver all fully paid securities in 
their control to, or as directed by, the participant for whom the 
securities are held,'' in light of the fact that registered clearing 
agencies had demonstrated a high level of responsibility in 
safeguarding securities and funds, the Commission did not find that a 
standard of care based on a strict standard of liability was required 
either with respect to failures of the clearing agency or a sub-
custodian.\21\
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    \20\ Securities Exchange Act Release Nos. 20221 (September 23, 
1983) and 22940 (February 24, 1986). In this regard, DTC adopted a 
uniform standard with respect to certain of its procedures, or 
Service Guides, such that DTC is not liable for any loss incurred by 
a participant other than one caused directly by gross negligence or 
willful misconduct on the part of DTC. See Securities Exchange Act 
Release No. 44719 (August 17, 2001) [File No. SR-DTC-2001-01].
    \21\ Securities Exchange Act Release No. 22940 (February 24, 
1986), 51 FR 7169 (order approving a rule change to establish a 
comprehensive standard of care and limitation of liability to its 
members).
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    DTC notes that securities in the FAST program are held by a 
transfer agent and are not within the immediate custody and control of 
DTC. As such, DTC is adding a clarifying provision to DTC's Rule 6, a 
rule pertaining to DTC's standard of care as it applies to DTC 
participants, to make clear that DTC will not be liable to participants 
for the acts or omissions of FAST Agents or other third parties 
(including, but not limited to, any depository, custodian, sub-
custodian, clearing or settlement system, transfer agent, registrar, 
data communication service or delivery service) unless a loss is caused 
directly by DTC's gross negligence, willful misconduct, or violation of 
federal securities laws for which there is a private right of action. 
In addition, DTC is making it clear that under no circumstance shall 
DTC be liable for the selection or acceptance of any third party as an 
agent of DTC, including a transfer agent participating in the FAST 
Program.

III. Comment Letters \22\
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    \22\ This order only addresses specific comments that relate to 
provisions in DTC's proposed rule change as the proposed rule change 
is being approved. It does not address comments on provisions that 
were either modified or deleted in response to comments.
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    The Commission received a total of 47 comment letters on DTC's 
initial proposal and the subsequent four amendments (published in three 
notices for comment).\23\ Specifically, the

[[Page 33500]]

Commission received twenty-seven comment letters on DTC's original 
proposed rule change, as amended by Amendments 1 and 2.\24\ Twenty-
three of the commenters opposed some or all of the provisions in the 
proposed rule change while three commenters supported the proposed rule 
change. DTC also submitted a comment letter addressing the concerns and 
issues raised by the opposing commenters.
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    \23\ Letters from Loren K. Hanson, Assistant Secretary, Otter 
Tail Corporation (June 5, 2007); Steven D. Lucas, Director of 
Transfer Agent Compliance, Investors Bank & Trust Company (June 15, 
2007); Walter E. Grote, Senior Vice President, Travelers Bond & 
Financial Products (June 19, 2007); The Surety & Fidelity 
Association of America (June 19, 2007); Thomas L. Montrone, 
President and Chief Executive Officer, Registrar and Transfer 
Company (June 19, 2007); Salli Marinov, President and Chief 
Executive Officer, First American Stock Transfer Company (June 20, 
2007); Steve Nelson, President and Chairman of the Board, 
Continental Stock Transfer & Trust Company (June 20, 2007); Dennis 
Callahan, Chairman, Bank Depository User Group (June 21, 2007); 
Kevin Kopaunik, Fidelity Transfer Company (June 21, 2007); Jonathan 
Miller, President StockTrans, Inc. (June 21, 2008); Artie Retolatto, 
1st Global Stock Transfer, LLC (June 21, 2007); James R. Alden, 
President, Shareholder Services Association (June 22, 2007); James 
Becker, Zions First National Bank (June 22, 2007); J. Donald Boggus, 
Jr., President and Chief Executive Officer, Crescent Banking Company 
and Crescent Bank and Trust Company (June 22, 2007); Albert Howell, 
Chairman, Regulatory and Clearance Committee, SIFMA Securities 
Operations Division, (June 22, 2007); Lennie M. Kaufman, Executive 
Vice President, Wells Fargo Shareowner Services (June 22, 2007); 
Lawrence Morillo, Chairman, Legal and Regulatory Subcommittee, SIFMA 
Operations Committee (June 22, 2007); J. Robert Morris, Managing 
Director, Valiant Trust Company (June 22, 2007); Cristeena G. Naser, 
Senior Counsel, Center for Securities, Trust & Investments, American 
Bankers Association (June 22, 2007); James R. Nielsen, Senior Vice 
President, U.S. Bank National Association (June 22, 2007); Charles 
V. Rossi, President, The Securities Transfer Association, Inc. (June 
22, 2007); Steven Rothbloom, President and Chief Executive Officer, 
Computershare North America (June 22, 2007); William Speirs, 
President, Securities Transfer Association of Canada (June 26, 
2007); Susanne Trimbath, PhD, Chief Executive Officer and Chief 
Economist, STP Advisory Services, LLC (June 26, 2007); Thomas M. 
Sullivan, Chief Counsel for Advocacy, and Charles A. Maresca, 
Director, Interagency Affairs, U.S. Small Business Administration 
(June 27, 2007); Gary N. Nazare, Managing Director, Transfer Agency 
Services, The Bank of New York (June 29, 2007), Charles Douglas 
Bethill, Thacher, Proffitt & Wood LLP (December 28, 2007), Charles 
V. Rossi, President, Securities Transfer Association, Inc. (March 
17, 2008); William Speirs, President, Securities Transfer 
Association of Canada (March 18, 2008); Steven G. Nelson, Chairman 
of the Board and President, Continental Stock Transfer & Trust 
Company (March 19, 2008); Martin J. McHale Jr., President, US Equity 
Services, Computershare (March 20, 2008); Loren Hanson, Assistant 
Secretary, Otter Tail Corporation (March 20, 2008); Kevin B. Halter, 
Jr., President, Securities Transfer Corporation (March 20, 2008); 
Mary C. Fernandez, Standard Registrar and Transfer Agency, Inc. 
(March 20, 2008); and Cristeena G. Naser, Senior Counsel, Center for 
Securities, Trust & Investments, American Bankers Association (March 
20, 2008).
    \24\ Letters from Loren K. Hanson, Assistant Secretary, Otter 
Tail Corporation (June 5, 2007); Steven D. Lucas, Director of 
Transfer Agent Compliance, Investors Bank & Trust Company (June 15, 
2007); Walter E. Grote, Senior Vice President, Travelers Bond & 
Financial Products (June 19, 2007); The Surety & Fidelity 
Association of America (June 19, 2007); Thomas L. Montrone, 
President and Chief Executive Officer, Registrar and Transfer 
Company (June 19, 2007); Salli Marinov, President and Chief 
Executive Officer, First American Stock Transfer Company (June 20, 
2007); Steve Nelson, President and Chairman of the Board, 
Continental Stock Transfer & Trust Company (June 20, 2007); Dennis 
Callahan, Chairman, Bank Depository User Group (June 21, 2007); 
Kevin Kopaunik, Fidelity Transfer Company (June 21, 2007); Jonathan 
Miller, President StockTrans, Inc. (June 21, 2008); Artie Retolatto, 
1st Global Stock Transfer, LLC (June 21, 2007); James R. Alden, 
President, Shareholder Services Association (June 22, 2007); James 
Becker, Zions First National Bank (June 22, 2007); J. Donald Boggus, 
Jr., President and Chief Executive Officer, Crescent Banking Company 
and Crescent Bank and Trust Company (June 22, 2007); Albert Howell, 
Chairman, Regulatory and Clearance Committee, SIFMA Securities 
Operations Division, (June 22, 2007); Lennie M. Kaufman, Executive 
Vice President, Wells Fargo Shareowner Services (June 22, 2007); 
Lawrence Morillo, Chairman, Legal and Regulatory Subcommittee, SIFMA 
Operations Committee (June 22, 2007); J. Robert Morris, Managing 
Director, Valiant Trust Company (June 22, 2007); Cristeena G. Naser, 
Senior Counsel, Center for Securities, Trust & Investments, American 
Bankers Association (June 22, 2007); James R. Nielsen, Senior Vice 
President, U.S. Bank National Association (June 22, 2007); Charles 
V. Rossi, President, The Securities Transfer Association, Inc. (June 
22, 2007); Steven Rothbloom, President and Chief Executive Officer, 
Computershare North America (June 22, 2007); William Speirs, 
President, Securities Transfer Association of Canada (June 26, 
2007); Susanne Trimbath, PhD, Chief Executive Officer and Chief 
Economist, STP Advisory Services, LLC (June 26, 2007); Thomas M. 
Sullivan, Chief Counsel for Advocacy, and Charles A. Maresca, 
Director, Interagency Affairs, U.S. Small Business Administration 
(June 27, 2007); Gary N. Nazare, Managing Director, Transfer Agency 
Services, The Bank of New York (June 29, 2007); and Charles Douglas 
Bethill, Thacher, Proffitt & Wood LLP (December 28, 2007).
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    In response to commenters' concerns raised by the first two 
amendments to DTC's proposed rule change, DTC amended its filing for a 
third time. The Commission received ten comment letters to the third 
amendment, with eight commenters continuing to oppose the filing \25\ 
and one commenter requesting clarification as to the application of one 
of the requirements of the proposed rule change to issuer transfer 
agents.\26\ In response to the concerns raised by these nine 
commenters, DTC submitted a comment letter.\27\ The comments set forth 
by those opposing the proposed rule change were for the most part the 
same concerns as were expressed in the comment letters submitted in 
response to the first notice of the first proposed rule change as 
amended by Amendments 1 and 2.
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    \25\ Letters from Charles V. Rossi, President, Securities 
Transfer Association, Inc. (March 17, 2008); William Speirs, 
President, Securities Transfer Association of Canada (March 18, 
2008); Steven G. Nelson, Chairman of the Board and President, 
Continental Stock Transfer & Trust Company (March 19, 2008); Martin 
J. McHale Jr., President, US Equity Services, Computershare (March 
20, 2008); Loren Hanson, Assistant Secretary, Otter Tail Corporation 
(March 20, 2008); Kevin B. Halter, Jr., President, Securities 
Transfer Corporation (March 20, 2008); Mary C. Fernandez, Standard 
Registrar and Transfer Agency, Inc. (March 20, 2008); and Cristeena 
G. Naser, Senior Counsel, Center for Securities, Trust & 
Investments, American Bankers Association (March 20, 2008).
    \26\ Letter from Ray Dunn, Director of Shareholder Services, The 
Southern Company (March 20, 2008).
    \27\ Letter from Charles Douglas Bethill, Thacher Proffitt & 
Wood, LLP (on behalf of DTC) (April 10, 2008).
---------------------------------------------------------------------------

    After approximately one and a half years of negotiations between 
DTC and the transfer agent community, DTC amended the proposed rule 
change for a fourth and final time. The Commission received ten comment 
letters in response to the proposed rule change as modified by 
Amendment 4, with nine commenters opposing some or all of the proposed 
rule and DTC again submitting a comment letter addressing the commenter 
concerns.\28\ Seven of the nine commenters opposing the proposed rule 
change expressed their concerns in response to one or both of the prior 
published notices. None of the commenters opposing the proposed rule 
change, as amended by the fourth amendment, raised any issues that had 
not been raised in their prior comment letters.
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    \28\ Letters from Martin J. McHale, President, U.S. Equity 
Services, Computershare (July 2, 2008); Loren Hanson, Assistant 
Secretary, Otter Tail Corporation (July 7, 2008); Charles V. Rossi, 
President, The Securities Transfer Association, Inc. (July 9, 2008); 
Kevin Kopaunik, Fidelity Transfer Company (July 10, 2008); Dorothy 
Miller, Vice President & Trust Officer, Hancock Bank (July 10, 
2008); Stephen G. Nelson, President and Chairman of the Board, 
Continental Stock Transfer & Trust Company (July 10, 2008); William 
Speirs, President, Securities Transfer Association of Canada (July 
11, 2008); Barbara J. Trivedi, Shareholder Services Manager, 
Crescent Banking Company, Crescent Bank and Trust Company (July 10, 
2008); Edward L. Pittman, Thelen Reid Brown Raysman & Steiner LLP 
(July 15, 2008); John Petrofsky, Associate Counsel, DTC (July 30, 
2008).
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    The majority of the nine commenters that opposed DTC's proposed 
rule change, which were issuers, transfer agents, or industry 
associations representing issuers or transfer agents, an insurance 
company, an association representing insurance companies, the American 
Banking Association (``ABA''), the Office of Advocacy of the Small 
Business Administration (``SBA''), and one individual, opposed the 
proposed rule change for various reasons. Most of the commenters raised 
a number of general policy concerns such as: (1) DTC lacks the 
authority to impose rules on transfer agents, and the imposition of 
such rules is inappropriate given the commercial relationship between 
transfer agents and DTC; (2) the specific requirements are unduly 
burdensome, unnecessary, costly (particularly with respect to small 
transfer agents), and without sufficient justification; (3) the 
proposed rule change appears based on the premise that transfer agents 
act as custodian for DTC's securities as recorded on the records of the 
issuer--a premise that the transfer agents and banks reject as 
erroneous; and (4) many of the provisions proposed by DTC are 
inconsistent with the movement to a book-entry form of securities 
ownership.
    The remaining commenters, which were predominantly industry 
associations representing broker-dealers, supported the proposed rule 
change because of their belief that DTC's proposed requirements are 
necessary to facilitate the continuing increase in the use of DRS, 
which they contend is necessary in order to achieve the industry's 
objective of decreasing or eliminating the use of securities 
certificates in the U.S. market, and to reduce the risks associated 
with the continuing increase in volume and value of DRS transactions.
    The following describes commenters' concerns with the specific 
provisions remaining in DTC's proposed rule

[[Page 33501]]

change in its final form after all amendments.
    Jurisdiction. Many of the commenters who are transfer agents or 
organizations representing transfer agents oppose the proposed rule 
change because they contend that the Commission and banking regulators 
are statutorily charged with the responsibility of regulating transfer 
agents, and DTC is not. They further argue that even though the 
transfer agents are ``limited participants'' of DTC with respect to 
their participation in DRS, transfer agents do not have the full 
procedural safeguards that statutorily exist for DTC participants 
pursuant to Section 17A of the Exchange Act.\29\ The transfer agents 
are also concerned that the rule change gives DTC ``unfettered'' 
discretion to decide which transfer agents are eligible to participate 
in DRS, to impose significant requirements to change transfer agent 
systems and operations, and to terminate transfer agents as FAST agents 
and limited participants at DTC's discretion.
---------------------------------------------------------------------------

    \29\ 15 U.S.C 78q-1(a)(3).
---------------------------------------------------------------------------

    Insurance Requirements. Almost all of those opposed to DTC's rule 
filing objected to some or all of DTC's proposed insurance requirements 
as being too costly and too onerous, particularly the ``excessively'' 
high minimum coverage levels, ``excessively'' low deductibles, and 
opposed the requirement of notifying DTC of changes in their insurance 
policies. The STA and several other commenters stated that they believe 
DTC and other registered holders have sustained virtually no economic 
losses as a result of under-insured transfer agent activity, thereby 
making the proposed insurance requirements unnecessary, overly broad, 
and without justification.
    Many of the commenters that oppose the rule change contend that for 
some smaller transfer agents, the amounts of proposed minimum insurance 
coverage would exceed the value of DTC's securities held by the 
transfer agent and therefore are not reasonable. One commenter 
representing a large number of commercial bank and non-bank transfer 
agents noted that it believes that none of its members currently meet 
the insurance and deductible requirements.\30\ In addition, this 
commenter along with the ABA and several other transfer agents opposed 
the requirement for transfer agents to (1) notify DTC at least 30 days 
prior to any expiration or change in insurance limits as unrealistic 
due to the manner in which policies are renewed, and (2) notify DTC 
within five days of any notice of threatened or actual lapse in 
coverage as an unreasonable burden on insurance carriers.
---------------------------------------------------------------------------

    \30\ Letter from the Securities Transfer Association (``STA'').
---------------------------------------------------------------------------

    Safekeeping Requirements. Most transfer agents that opposed the 
amended proposed rule change took issue with DTC dictating specific 
physical security standards with respect to transfer agents' 
safeguarding obligations. Many of these commenters suggested that the 
Commission's safekeeping rule, Rule 17Ad-12, is sufficient to govern 
transfer agent safeguarding obligations.
    DTC maintains that specific physical security standards are 
justified in light of transfer agents holding blank securities 
certificates, which can and have been fraudulently issued or endorsed.
    Audit Requirements. Almost all the commenters opposing the proposed 
rule change objected to some or all of DTC's proposed audit 
requirements. Most of the transfer agents and industry associations 
representing issuers and agents argued that requiring submission to DTC 
of a SAS 70 or SSAE-19 report certifying compliance with DTC 
requirements and Commission rules and requiring attesting to the 
soundness of the transfer agent's controls is superfluous, unwarranted, 
and costly, especially in light of the requirement that an audit report 
be filed with the Commission by registered transfer agents pursuant to 
Exchange Act Rule 17Ad-13. The transfer agents contended that the 
existing Commission regulations should be sufficient to satisfy DTC's 
concerns.
    One issuer acting as its own transfer agent stated its belief that 
DTC rules have been developed to address large commercial transfer 
agent operations without taking into consideration other types of 
transfer agents. This commenter noted that pursuant to an exemption 
provided to small transfer agents under Commission Rule 17Ad-4, it is 
exempted from the Commission's audit requirements. This commenter 
stated that small transfer agents pose significantly less risk to the 
public than large commercial transfer agents, thereby providing the 
basis for the Commission's exemption. This comment also argued that as 
a publicly traded company, it has audit requirements, including 
internal controls that are audited internally and externally pursuant 
to federal regulation. Compliance with DTC's rules, this transfer agent 
estimated, would cost in excess of $10,000 per year for the audit when 
it conducts less than 1,000 transfers per year.
    Shareholder Statements. Many transfer agents objected to DTC 
requiring that for DRS withdrawal-by-transfers, DRS Limited 
Participants send a transaction advice to shareholders by mail and to 
DTC by electronic file. While the concept of sending such statements 
was not objectionable to most of the transfer agents opposing this 
requirement, the STA maintains that DTC has no authority to mandate 
notifications to shareholders holding positions in DRS.
    Notice of Regulatory Action and On-site Inspection by DTC. The STA 
and a number of transfer agents opposed the requirement to provide DTC 
with copies of Commission examination reports within five business days 
of ``any alleged material deficiencies.'' The transfer agents contend 
they do not provide this information to any other registered 
securityholder, DTC has failed to demonstrate a need for such 
information, and DTC is not entitled to this confidential information 
under applicable law or regulation. They also objected to the 
requirement that transfer agents allow DTC access to their premises for 
on-site inspections.
    System Modifications and Enhanced DRS Processing Capabilities. The 
STA and a number of transfer agents objected to DTC requiring transfer 
agents to implement program changes and system modifications to support 
and expand DRS processing capabilities. The transfer agents contend 
that such a requirement fails to address the reasonableness and 
necessity of any changes and fails to address the costs that may be 
incurred by transfer agents. Transfer agents objected to DTC 
unilaterally determining what changes to make to FAST and DRS without 
agreement from the transfer agents. They also objected to the use of 
the DRS Ad Hoc Committee as the ultimate arbiter of disputes because 
they believe the Committee is dominated by DTC and its participants and 
because the Committee has no governing by-laws or rules.
    Compensation. The STA objected as commercially unreasonable that 
transfer agents provide DRS and FAST services to DTC without 
compensation. It argued that transfer agents should be entitled to 
refuse to provide DTC services if DTC refuses to pay for services 
rendered without the threat that DTC could throw them out of FAST and 
DRS.
    Standard of Care. Transfer agents opposed DTC's standard of care 
provision because they believe that it would permit DTC to avoid 
responsibility for its own errors and would force transfer agents to be 
responsible if a third party (i.e., broker-

[[Page 33502]]

dealer or registered shareholder) were to suffer a loss caused by an 
error at DTC with regard to transactions or transfers involving 
transfer agents. They contend that the exculpatory language would force 
injured parties to seek recovery from the transfer agent even in the 
event the transfer agent were not at fault instead of each party 
bearing responsibility for its own processing errors. The transfer 
agents state that a unilateral waiver would not be in accordance with 
standard industry practice or public policy.
    Regulatory Flexibility Act of 1980. The transfer agents contend 
that no evidence of any assessment has been done by DTC to examine the 
economic impact on small transfer agents or small issuers to ensure 
compliance with the requirements of the Regulatory Flexibility Act of 
1980.\31\
---------------------------------------------------------------------------

    \31\ The Commission notes that the Regulatory Flexibility Act of 
1980 is not applicable to proposed rule changes filed by self-
regulatory organizations pursuant to Section 19(b) of the Exchange 
Act.
---------------------------------------------------------------------------

IV. Discussion

    Section 17A(b)(3)(F) of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions, 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, to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions, and 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.\32\ For the reasons described below, the Commission finds 
that the rule change as amended is consistent with these provisions of 
Section 17A.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------

    In Section 17A of the Act, Congress set forth its finding that the 
prompt and accurate clearance and settlement of securities 
transactions, including the transfer of record ownership and 
safeguarding of securities and funds related to clearance and 
settlement activities, is necessary for the protection of investors and 
those acting on behalf of investors.\33\ Inefficient clearance and 
settlement procedures, Congress found, impose unnecessary costs on 
investors and those acting on their behalf.\34\ The Commission's 
approval of DTC's registration as a clearing agency constituted an 
important step in its efforts to facilitate the development of a 
national clearance and settlement system and a significant step in 
achieving the goals established by Congress.\35\
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78q-1(a)(1)(A).
    \34\ 15 U.S.C. 78q-1(a)(1)(B).
    \35\ Exchange Act Release No. 20221 (September 23, 1983), 48 FR 
45167 (October 3, 1983).
---------------------------------------------------------------------------

    Consistent with this directive, the Commission has encouraged the 
immobilization and the dematerialization of securities holdings by 
supporting the use of alternatives to holding securities in 
certificated form in an effort to improve efficiencies and decrease 
risks associated with processing securities certificates.\36\ 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 \37\ and require 
that before any security can be listed for trading, it must have been 
made depository eligible if possible.\38\ The Commission has also 
approved a number of rule filings relating to DTC's FAST program, which 
has facilitated significantly more efficient processing of transfers by 
eliminating the physical delivery of securities certificates between 
transfer agents and DTC.\39\ More recently the Commission has approved 
the implementation and expansion of DRS by approving DTC's rules 
relating to the administration of DRS facilities used by transfer 
agents and broker-dealers.\40\
---------------------------------------------------------------------------

    \36\ The use of certificates often results in significant delays 
and expenses in processing securities transactions and raises safety 
concerns associated with lost, stolen, and counterfeit certificates. 
The concerns associated with lost certificates were dramatically 
demonstrated during the September 11, 2001, tragedy when tens of 
thousand of certificates maintained in broker-dealers' vaults either 
were destroyed or were unavailable for transfer. See 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).
    \37\ 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).
    \38\ Securities Exchange Act Release No. 35798 (June 1, 1995), 
60 FR 30909 (June 12, 1995) (order approving rules setting forth 
depository eligibility requirements for issuers seeking to have 
their shares listed on the exchange).
    \39\ Securities Exchange Act Release Nos. 13342 (March 8, 1977) 
[File No. SR-DTC-76-3]; 14997 (July 26, 1978) [File No. SR-DTC-78-
11]; 21401 (October 16, 1984) [File No. SR-DTC-84-8]; 31941 (March 
3, 1993) [SR-DTC-92-15]; and 46956 (December 6, 2002) [File No. SR-
DTC-2002-15].
    \40\ See supra note 10.
---------------------------------------------------------------------------

    DTC's FAST program authorizes transfer agents to hold securities on 
behalf of DTC in order to avoid having multiple physical certificates 
sent between transfer agents and DTC because of DTC's ever-changing 
ownership positions. Eliminating the need to transfer a physical 
certificate every time DTC's ownership position changes reduces risk 
and costs of processing transfers, which is a benefit to not only DTC, 
transfer agents, and issuers but also to the millions of beneficial 
owners of the securities holding in street name at DTC.
    Because of the critical role the FAST and DRS programs play in the 
clearance and settlement of transactions in securities, which are 
legally owned by DTC and beneficially owned by DTC participants and 
their customers, the Commission believes that DTC has a legitimate 
interest in making sure that FAST agents and DRS Limited Participants 
comply with reasonable and appropriate requirements for participation 
in these programs in order that DTC can fulfill its statutory 
obligation to safeguard securities and funds that are in its custody or 
control or for which it is responsible. In response to the comments 
submitted in response to the proposed rule changes, DTC amended its 
proposal four times in an effort to reduce the cost and operational 
burden on transfer agents while still maintaining the appropriate level 
of safeguards necessary for DTC to comply with its statutory 
obligations. The Commission believes that the requirements, as amended, 
are fair and reasonable in light of the vital function the FAST and DRS 
programs play in the national clearance and settlement system and 
should help further improvements in the interactions between transfer 
agents and DTC, which is an essential component of improving the 
industry's dematerialization efforts.
    In adopting these new rules, the Commission does not believe that 
DTC is attempting to ``regulate'' transfer agents as some commenters 
contended. Rather, the Commission believes that DTC is imposing 
reasonable obligations necessary for it to comply with its statutory 
obligations and only on those transfer agents that choose to 
participate in its FAST and DRS programs. Further, as a self-regulatory 
organization, DTC is required to file rule changes affecting the FAST 
or DRS program, and by extension, those transfer agents participating 
in these programs, with the Commission pursuant to Section

[[Page 33503]]

19(b) of the Exchange Act. Most of these filings have been and will 
continue to be filed with the Commission, published for public comment, 
and subject to the review and approval by the Commission. This process 
should provide transfer agents, as well as others affected by DTC's 
rules, adequate procedural safeguards.
    Some commenters contend that by allowing DTC the authority to 
determine which transfer agents may become a FAST transfer agent or DRS 
Limited Participant, DTC is also granted by extension the authority to 
determine which transfer agents may continue to operate a transfer 
agent business. The Commission does not agree. Many transfer agents act 
as transfer agent for publicly traded securities and are not FAST 
agents or DRS Limited Participants. But if a transfer agent chooses to 
act as transfer agent for an issuer of securities that requires it to 
become a FAST agent or DRS Limited Participant, then DTC has an 
interest and statutory responsibility to ensure that the securities 
held on its behalf at the transfer agent are safeguarded and that the 
settlement of transactions in those securities, which includes safe and 
efficient transfers in ownership, occurs in a prompt and accurate 
manner.
    With regards to specific operational requirements required by DTC's 
rule, such as insurance requirements, physical security standards, 
audit requirements, and system modifications to support or enhance DRS 
functionality, the Commission believes that the amended rule contains 
standards that are appropriate and reasonably designed to achieve DTC's 
goal of protecting the securities held by transfer agents on DTC's 
behalf and on behalf of DTC's participants and the participants' 
customers. The Commission does not find it compelling to contend that 
just because DTC and other registered holders have not sustained 
economic losses, DTC's insurance requirements are overly broad or 
unjustified. The point of the rule's insurance requirement is to 
protect against losses before losses occur. Furthermore, if a transfer 
agent can demonstrate that its existing coverage or capitalization 
provide similar protections as the insurance required DTC, DTC has the 
discretion to grant a waiver from any or all of the requirement. This 
flexibility should provide DTC the ability to properly address 
situations where the required coverage is too onerous or ineffective 
for the type, amount, or dollar value of DTC's securities held by the 
transfer agent.
    The Commission also finds little merit in the contention that the 
audit reports required by the rule are unwarranted or unnecessarily 
costly. The Commission believes that requiring transfer agents to 
provide to DTC the Annual Study of Evaluation of Internal Accounting 
Controls, conducted pursuant to Rule 17Ad-13, and a SAS-70 audit 
report, if the agent has already obtained such a report for other 
purposes, are reasonable in light of DTC's statutory obligations to 
ensure the safeguarding of its securities. These audit reports provide 
DTC with additional information about the adequacy of the transfer 
agent's operational capabilities and internal controls for the transfer 
of record ownership and the safeguarding of related securities and 
funds. This is not only relevant but material information to DTC. In 
addition, because DTC's rule requires that transfer agents provide DTC 
with documents that have already been produced by the transfer agent 
for other purposes and should be in the transfer agent's possession, 
the Commission believes that there should be little or no additional 
expense and relatively little extra burden on transfer agents in 
providing these documents to DTC.
    Similarly, commenters' concerns about requiring transfer agents to 
provide DTC with a copy of the two most recent compliance or deficiency 
correspondences from the Commission and all notices of alleged material 
deficiencies documented by the Commission appear to be misplaced. While 
the Commission appreciates the sensitive nature of transfer agent 
examination reports and the need to ensure the confidentiality of all 
information contained in those reports, the Commission believes 
nonetheless that DTC's request for these documents is reasonable. 
Information contained in those reports should allow DTC to better 
manage any potential risks associated with the transfer agent's ability 
to transfer securities, maintain ownership records, or operate its 
business in a safe manner.
    Even though some commenters objected to DTC's provision requiring 
transfer agents to send DTC a file indicating a transaction advice has 
been sent to investors for each DRS withdrawal-by-transfers, the 
Commission believes DTC has a valid interest in requiring notice that 
investors have obtained a transaction advice from transfer agents. The 
file required to be sent to DTC will provide confirmation that the 
transaction advice has been sent to the investor so that DTC can close 
out its pending transfer position or file (sometimes referred to as an 
open transfer record). If that position is not closed, then DTC's 
records will show that the transfer remains open and it will become an 
outstanding aged transfer. To avoid this, DTC is requiring transfer 
agents to send a notice that the transfer has been completed by sending 
the investor a transaction advice. This process is similar to that of 
the current process when a transfer agent notifies DTC that a 
certificate has been mailed to the investor.
    Finally, the Commission believes that commenters' concerns 
regarding the rule's clarification of DTC's standard of care provision 
are unfounded. The purpose of the rule change is to clarify that DTC 
shall not be liable to participants for acts or omissions of any third 
party (including without limitation any depository, custodian, sub-
custodian, clearing or settlement system, transfer agent, registrar, 
data communication service or delivery service). DTC's Rule 6 applies 
to DTC's relationship with its participants, not FAST agents. 
Therefore, this particular provision does not have any impact on FAST 
Agents that are not also participants. The provision does not shift 
liability from DTC to FAST Agents or absolve DTC from liability to FAST 
Agents.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change, as amended, 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, as amended, (File No. SR-DTC-2006-16) be and hereby is 
approved.\41\
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    \41\ 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).
    \42\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-16455 Filed 7-10-09; 8:45 am]

BILLING CODE 8010-01-P