Document ID: SEC-2014-0476-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2014-03-25T04:00Z

[Federal Register Volume 79, Number 57 (Tuesday, March 25, 2014)]
[Notices]
[Pages 16392-16401]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06459]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71745; File No. SR-DTC-2013-11]

Self-Regulatory Organizations; Depository Trust Company; Notice 
of Filing Amendment Nos. 1 and 2 and Order Instituting Proceedings To 
Determine Whether To Approve or Disapprove a Proposed Rule Change To 
Specify Procedures Available to Issuers of Securities Deposited at DTC 
for Book Entry Services When DTC Imposes or Intends To Impose 
Restrictions on the Further Deposit and/or Book Entry Transfer of Those 
Securities

March 19, 2014.
    On December 5, 2013, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-DTC-2013-11 (``Proposed Rules'') pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Exchange Act'') \1\ 
and Rule 19b-4 thereunder.\2\ The Proposed Rules were published in the 
Federal Register on December 24, 2013.\3\ The Commission received nine 
comments from seven commenters to the Proposed Rules and two letters 
from DTC responding to those comments.\4\ On February 10, 2014, DTC 
filed Amendment No. 1 to the Proposed Rules. On March 10, 2014,

[[Page 16393]]

DTC filed Amendment No. 2 to the Proposed Rules.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Release No. 34-71132 (Dec. 18, 2013); 78 FR 77755 (Dec. 
24, 2013).
    \4\ See Letters to Elizabeth M. Murphy, Secretary, Commission 
from: Suzanne H. Shatto dated December 20, 2013 (``Shatto Letter''); 
Simon Kogan dated December 22, 2013 (``Kogan Letter''); DTCC BigBake 
dated December 27, 2013 (``DTCC BigBake Letter I'') and March 14, 
2014 (``DTCC BigBake Letter II''); Brenda Hamilton, Hamilton & 
Associates Law Group, PA (``Hamilton Letter''); Charles V. Rossi, 
Chairman, STA Board Advisory Committee, Securities Transfer 
Association dated January 14, 2014 (``STA Letter''); Louis A 
Brillemen, Louise A. Brilleman, P.C. dated January 14, 2014 
(``Brilleman Letter''); Gary Emmanuel and Harvey Kesner, Sichenzia 
Ross Friedman Ference LLP dated January 14, 2014 (``Sichenzia Letter 
I'') and February 24, 2014 (``Sichenzia Letter II''); and Isaac 
Montal, Managing Director and Deputy General Counsel, DTCC dated 
February 10, 2014 (``DTC Letter I'') and March 3, 2014 (``DTC Letter 
II'').
---------------------------------------------------------------------------

    The Commission is publishing this notice and order to solicit 
comments on Amendment Nos. 1 and 2 from interested persons and to 
institute proceedings under Section 19(b)(2)(B) of the Exchange Act \5\ 
to determine whether to approve or disapprove the Proposed Rules. The 
institution of proceedings does not indicate that the Commission has 
reached any conclusions with respect to any of the issues involved, nor 
does it mean that the Commission will ultimately disapprove the 
Proposed Rules. Rather, the Commission seeks and encourages interested 
persons to provide additional comment on the Proposed Rules to inform 
the Commission's analysis of whether to approve or disapprove the 
Proposed Rules.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

I. Background

    The Proposed Rules specify procedures available to issuers of 
securities deposited at DTC when DTC blocks or intends to block the 
deposit of additional securities of a particular issue (``Deposit 
Chill'') \6\ or prevents or intends to prevent deposits and restrict 
book-entry and related depository services of a particular issue 
(``Global Lock'').
---------------------------------------------------------------------------

    \6\ Securities subject to a Deposit Chill remain eligible for 
book-entry transfer at DTC.
---------------------------------------------------------------------------

A. International Power

    DTC filed the Proposed Rules in response to the Commission's 
opinion in In the Matter of International Power Group, Ltd. 
(``International Power'').\7\ In International Power, the Commission 
held that issuers were entitled to ``fair procedures'' under Section 
17A(b)(3)(H) when a clearing agency restricts or denies them access to 
services.\8\ In addition, the Commission stated that it believes ``DTC 
should adopt procedures that accord with the fairness requirements of 
Section 17A(b)(3)(H), which may be applied uniformly in any future such 
issuer cases.'' \9\ Those procedures must also comply with Section 
17A(b)(5)(B) of the Exchange Act, which requires clearing agencies when 
prohibiting or limiting a person's access to services, to (1) notify 
such person of the specific grounds for the prohibition or limitation, 
(2) give the person an opportunity to be heard upon the specific 
grounds for the prohibition or limitation, and (3) keep a record.\10\
---------------------------------------------------------------------------

    \7\ Int'l Power Group, Ltd., Securities Exchange Act Rel. No. 
66611 (Mar. 15, 2012), 2012 SEC LEXIS 844.
    \8\ Int'l Power, 2012 SEC LEXIS 844, at *16. The Commission also 
held that the Commission has jurisdiction under Section 19(f) of the 
Exchange Act to review an issuer's appeal of a suspension or 
limitation on access to a clearing agency's services. The Commission 
remanded the case to DTC to provide fair procedures.
    \9\ Int'l Power, 2012 SEC LEXIS 844, at *32.
    \10\ Int'l Power, 2012 SEC LEXIS 844, at *24.
---------------------------------------------------------------------------

    However, the Commission also acknowledged a clearing agency's need 
to act to avert ``imminent harm.'' \11\ The Commission stated a 
clearing agency may justifiably impose a suspension of services in 
advance of providing the issuer with notice and an opportunity to be 
heard.\12\ In such circumstances, a clearing agency's procedures 
``should balance the identifiable need for emergency action with the 
issuer's right to fair procedures'' and any suspension could not be 
maintained ``indefinitely without providing expedited fair process to 
the affected issuer.'' \13\
---------------------------------------------------------------------------

    \11\ Int'l Power, 2012 SEC LEXIS 844, at *29.
    \12\ Int'l Power, 2012 SEC LEXIS 844, at *29.
    \13\ Int'l Power, 2012 SEC LEXIS 844, at *29.
---------------------------------------------------------------------------

B. DTC's Role Under Section 17A of the Exchange Act

    DTC is the nation's central securities depository, registered as a 
clearing agency under Section 17A of the Exchange Act.\14\ DTC performs 
services and maintains securities accounts for its participants, 
primarily banks and broker dealers (``Participants'').\15\ Participants 
may present a security \16\ to be made eligible for DTC's depository 
and book-entry services. If DTC accepts the security as eligible for 
those services and the security is deposited with DTC for credit to the 
securities account of a Participant, it becomes an ``Eligible 
Security.'' \17\ Thereafter, other Participants may deposit that 
Eligible Security into their respective DTC accounts. Once the Eligible 
Security is credited to the account of one or more Participants, 
interests in that Eligible Security may be transferred among 
Participants by book-entry in accordance with the DTC Rules and 
Procedures.
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 20221 (Sept. 23, 
1983), 48 FR 45167 (Oct. 3, 1983).
    \15\ See 15 U.S.C. 78c(a)(24).
    \16\ ``Security'' is defined in DTC's rules as follows: The term 
``Security'' has the meaning given to the term ``financial asset'' 
in Section 8-102 of the [Uniform Commercial Code of New York]. Any 
item credited to an Account (by the act of being credited to the 
Account) shall be deemed a Security under these Rules and shall be 
treated as a financial asset under Article 8 of the [Uniform 
Commercial Code of New York]. A Security may be an Eligible 
Security, a Deposited Security, a Pledged Security, a Segregated 
Security or an MMI Security, or some or all of them collectively, as 
the context may require. The term ``Security'' shall not include 
Preferred Stock. See DTC Rule 1.
    \17\ Eligible Security is defined in DTC's rules as ``a Security 
accepted by the Corporation, in its sole discretion, as an Eligible 
Security. The Corporation shall accept a Security as an Eligible 
Security only (a) upon a determination by the Corporation that it 
has the operational capability and can obtain information regarding 
the Security necessary to permit it to provide its services to 
Participants and Pledgees when such Security is Deposited and (b) 
upon such inquiry, or based upon such criteria, as the Corporation 
may, in its sole discretion, determine from time to time. The timing 
of additions of such issues shall be on a nondiscriminatory basis 
consistent with the Corporation's objective to provide the maximum 
practical degree of service in facilitating the prompt and orderly 
settlement of Securities transactions.'' See DTC Rule 1 and DTC Rule 
5, Section 1.
---------------------------------------------------------------------------

    As provided in the DTC Rules and Procedures, DTC processes the 
transfer of interests in Eligible Securities among DTC Participants by 
credits and debits to Participant accounts in accordance with the 
instructions of delivering and receiving Participants who are parties 
to the transaction. DTC Participants agree to be bound by DTC's Rules 
and Procedures as a condition of membership.
    To facilitate book-entry transfer and other services that DTC 
provides for its Participants with respect to Deposited Securities,\18\ 
Eligible Securities are registered on the books of the issuer 
(typically, in a register maintained by a transfer agent) in DTC's 
nominee name, Cede & Co. DTC maintains Eligible Securities of an issue 
in fungible bulk so that each Participant with an interest in the 
security has a pro rata interest in DTC's entire inventory of that 
issue, but none of the securities on deposit is identifiable to or 
owned by any particular Participant.\19\
---------------------------------------------------------------------------

    \18\ Deposited Security is defined in DTC's rules as ``an 
Eligible Security credited to the Account of a Participant by 
Deposit or Delivery. A Deposited Security shall cease to be such if 
it becomes a Pledged Security or is Withdrawn.'' See DTC Rule 1.
    \19\ See Securities Exchange Act Release No. 19678 (Apr. 15, 
1983), 48 FR 17603, 17605, n.5 (Apr. 25, 1983) (describing fungible 
bulk); see also N.Y. Uniform Commercial Code, Sec.  8-503, Off. Cmt 
1 (``. . . all entitlement holders have a pro rata interest in 
whatever positions in that financial asset the [financial] 
intermediary holds'').
---------------------------------------------------------------------------

    DTC's deposit and book-entry transfer services facilitate the 
operation of the nation's securities markets. By serving as registered 
holder of trillions of dollars of securities, DTC processes the 
enormous volume of daily securities transactions by the book-entry 
movement without the need to transfer physical certificates.

C. DTC Eligibility Standards

    DTC's Rules and Procedures authorize DTC to determine whether to 
accept a security as an Eligible Security and when an Eligible Security 
will cease to be such.\20\ They also provide that DTC ``may limit 
certain services to particular

[[Page 16394]]

issues of Eligible Securities.'' \21\ The standards for determining 
whether a security is an Eligible Security are as follows: \22\
---------------------------------------------------------------------------

    \20\ See DTC Rule 5.
    \21\ See DTC Rule 6.
    \22\ See DTC's Operational Arrangements, Section I.A.2.

    Generally, the issues that may be made eligible for DTC's book-
entry delivery, settlement and depository services are those that 
have been issued in a transaction that: (i) Has been registered with 
the Commission pursuant to the Securities Act of 1933 (``Securities 
Act''); (ii) was exempt from registration pursuant to a Securities 
Act exemption that does not involve (or, at the time of the request 
for eligibility no longer involves) transfer or ownership 
restrictions; or (iii) permits resale of the securities pursuant to 
Rule 144A or Regulation S and in all cases such securities otherwise 
---------------------------------------------------------------------------
meet DTC's eligibility criteria.

    Thus, an essential element of DTC eligibility is that the 
securities are ``freely tradeable'' or, if restricted by Rule 144A \23\ 
or Regulation S under the Securities Act, are processed through a 
separate program in which Participants acknowledge and agree to comply 
with the applicable restrictions.
---------------------------------------------------------------------------

    \23\ 17 CFR 230.144A.
---------------------------------------------------------------------------

    In determining whether deposited securities satisfy DTC's 
eligibility requirements, DTC may require an issuer to provide an 
opinion from outside counsel in order ``to substantiate the legal basis 
for eligibility.'' \24\ DTC also reserves the right to require an 
opinion of counsel in support of eligibility requirements ``to protect 
DTC and its Participants from risk.'' \25\
---------------------------------------------------------------------------

    \24\ The Operational Arrangements further specify that such 
counsel must be ``an experienced securities practitioner, licensed 
to practice law in the relevant jurisdiction and in good standing in 
any bar to which such practitioner is admitted. See DTC Operational 
Arrangements Section I.B.2. Such counsel must be engaged in an 
independent private practice (i.e., not in-house counsel) and may 
not have a beneficial ownership interest in the security for which 
the opinion is being provided or be an officer, director or employee 
of the Issuer.'' See DTC Operational Arrangements Section I.A.1.
    \25\ Id.
---------------------------------------------------------------------------

II. Description of the Proposed Rules

A. Proposed Rule 22(A): Deposit Chills

1. Scope of Proposed Rule 22(A)
    Proposed Rule 22(A) sets forth procedures available to issuers of 
Eligible Securities where DTC detects unusually large volumes of 
deposits of a low priced or thinly traded Eligible Security and, as a 
result, determines to impose or intends to impose a Deposit Chill.\26\ 
The procedures will also apply if DTC imposes or intends to impose a 
Deposit Chill pursuant to its obligations under the Securities Act of 
1933 (``Securities Act''), the Bank Secrecy Act (``BSA'') or any rules, 
regulations, or guidance promulgated under the BSA, including rules or 
regulations that the Office of Foreign Asset Control promulgates.\27\
---------------------------------------------------------------------------

    \26\ See Proposed Rule 22(A)(1).
    \27\ Proposed Rule 22(A)(3)(b)(iii).
---------------------------------------------------------------------------

    However, Proposed Rule 22(A) will not apply when DTC ``impose[s] 
operational restrictions on deposits or other services in connection 
with ordinary course of business processing of Eligible Securities.'' 
\28\ One example of ``ordinary course of business processing'' is the 
processing of corporate actions, including name changes and stock 
splits. It will also not apply to other restrictions in DTC's 
Procedures \29\ that do not constitute a Deposit Chill for purposes of 
Proposed Rule 22(A).
---------------------------------------------------------------------------

    \28\ Proposed Rule 22(A)((3)(b)(2).
    \29\ ``Procedures'' means the ``Procedures, service guides, and 
regulations of the Corporation adopted pursuant to Rule 27, as 
amended from time to time.'' See DTC Rule 1. In its filing with the 
Commission, DTC proposed to amend this definition to include 
``operational arrangements.''
---------------------------------------------------------------------------

2. Deposit Chill Notice
    DTC will send notice of the Deposit Chill (``Deposit Chill 
Notice'') to an issuer:
     No later than twenty Business Days \30\ prior to the 
imposition of the Deposit Chill or;
---------------------------------------------------------------------------

    \30\ ``Business Days'' means any day on which DTC is open for 
business. See DTC Rule 1.
---------------------------------------------------------------------------

     No later than three Business Days after imposition of the 
Deposit Chill in the event DTC must first impose the Deposit Chill:
    [cir] ``in order to prevent imminent harm, injury or other such 
consequences to [DTC] or its Participants;'' or
    [cir] if DTC ``reasonably determines that such action is necessary 
to protect the prompt and accurate clearance and settlement of 
securities transactions through [DTC].'' \31\
---------------------------------------------------------------------------

    \31\ Proposed Rule 22(A)(2).
---------------------------------------------------------------------------

    The Deposit Chill Notice will inform the issuer of the reasons for 
DTC's actions, including the legal authority upon which DTC relies to 
impose the Deposit Chill.\32\ It will also provide the date the Deposit 
Chill was imposed or the date it will be imposed, should the issuer 
fail to respond to the Deposit Chill Notice.\33\
---------------------------------------------------------------------------

    \32\ Proposed Rule 22(A)(2)(a)(i).
    \33\ Id.
---------------------------------------------------------------------------

3. Deposit Chill Response
    If the issuer elects to contest the Deposit Chill, it may submit a 
response (``Deposit Chill Response'') in the form and containing the 
substance provided in the Deposit Chill Notice.\34\ If the issuer 
demonstrates to DTC's ``reasonable satisfaction'' that the issue 
complies with DTC's eligibility requirements and the applicable 
Procedures,\35\ the Deposit Chill will be lifted or will not be 
imposed. DTC must receive the Deposit Chill Response within twenty 
Business Days after the date of the Deposit Chill Notice. However, DTC 
may extend this deadline for up to an additional twenty Business Days 
if the issuer establishes ``good cause.'' \36\
---------------------------------------------------------------------------

    \34\ Proposed Rule 22(A)(2)(a)(ii).
    \35\ See DTC Rule 5.
    \36\ Proposed Rule 22(A)(2)(a)(iv).
---------------------------------------------------------------------------

    The Deposit Chill Response must include a legal opinion (``Legal 
Opinion'') from ``an independent securities counsel retained by the 
issuer and reasonably acceptable'' to DTC.\37\ The Legal Opinion must 
establish that the security at issue meets DTC's eligibility 
requirements by showing either that the securities (i) are not 
restricted securities under SEC Rule 144(a)(3),\38\ or (ii) are exempt 
from any restrictions on transferability under the Securities Act.\39\ 
The Legal Opinion must be satisfactory to DTC, but DTC will not 
``unreasonably withhold its acceptance'' if the Legal Opinion 
``includes the material contents of the Template.'' \40\
---------------------------------------------------------------------------

    \37\ Proposed Rule 22(A)(2)(a)(iii). In its filing with the 
Commission, DTC stated that in determining whether counsel is 
acceptable for this purpose ``DTC refers to the relevant provisions 
set forth in the Operational Arrangements.'' Those provisions 
provide that counsel must be ``an experienced securities 
practitioner, licensed to practice law in the relevant jurisdiction 
and in good standing in any bar to which such practitioner is 
admitted. Such counsel must be engaged in an independent private 
practice (i.e. not in-house counsel) and may not have a beneficial 
ownership interest in the security for which the opinion is being 
provided or be an officer, director or employee of the Issuer.'' See 
Operational Arrangements, Section I.A.1. A template legal opinion 
(``Template'') will be included with the Deposit Chill Notice.
    \38\ 17 CFR 230.144(a)(3).
    \39\ The eligibility requirements are set forth in DTC Rule 5 
and Section 1 of DTC's Operational Arrangements.
    \40\ Proposed Rule 22(A)(2)(b).
---------------------------------------------------------------------------

4. Request for Additional Information
    Upon receiving the Deposit Chill Response, DTC may request 
additional information from the issuer (``Additional Information 
Request''). DTC will set a time frame for the issuer's response to the 
Additional Information Request (``Additional Information Response''), 
but in no case will it be less than ten Business Days from the date of 
the Additional Information Request.
5. Deposit Chill Decision
    If an issuer submits a Deposit Chill Response, DTC will provide the 
issuer

[[Page 16395]]

with a written decision (``Deposit Chill Decision''). An officer of DTC 
who did not have a role in the decision to impose the Deposit Chill 
(``Officer'') will make the Deposit Chill Decision.\41\
---------------------------------------------------------------------------

    \41\ ``Officer'' of DTC is defined as ``an Executive Chairman of 
the Board and a Chief Executive Officer, each of whom shall be 
elected by the Board of Directors from among its own number, a Chief 
Operating Officer, one or more Managing Directors, a Secretary, a 
Treasurer, a Comptroller and an Auditor, and may include one or more 
Assistant Secretaries and one or more Assistant Treasurers. The 
officers shall be elected by the Board at the first meeting of the 
Board after the annual meeting of the shareholders in each year. The 
Board may elect or appoint other officers (including, but not 
limited to, a Vice Chairman of the Board, a President and one or 
more Vice Presidents), agents and employees, who shall have such 
authority and perform such duties as may be prescribed by the Board. 
. . . '' See DTC By-Laws Section 3.1.
---------------------------------------------------------------------------

Timing of Deposit Chill Decision
    If a Deposit Chill was imposed prior to the issuance of a Deposit 
Chill Notice, the Deposit Chill Decision will be provided within ten 
Business Days after receipt of the Deposit Chill Response or the 
Additional Information Response, if applicable. If a Deposit Chill was 
not imposed prior to the issuance of a Deposit Chill Notice, the 
Deposit Chill Decision will be provided within twenty Business Days 
after receipt of the Deposit Chill Response or the Additional 
Information Response, if applicable.
Effect of Deposit Chill Decision
    The Deposit Chill Decision will result in DTC either: (i) Not 
imposing or releasing a Deposit Chill; or (ii) imposing a Global Lock 
on the security. DTC will not impose a Deposit Chill or will release a 
Deposit Chill already in place ``if the Officer reasonably determines 
that the Deposit Chill Response has established that the securities 
subject thereof satisfy [DTC's] eligibility requirements'' particularly 
that they satisfy DTC's eligibility requirements as set forth in Rule 5 
and Section 1 of DTC Operational Arrangements.
    DTC will intend to impose a Global Lock if the Officer reasonably 
determines that the Deposit Chill Response does not satisfy the 
substantive requirements in the Deposit Chill Notice. DTC will also 
impose a Global Lock if the issuer does not submit a Deposit Chill 
Response within the applicable time period.
    Prior to imposition of the Global Lock in this circumstance, an 
issuer has ten Business Days to submit a supplemental Deposit Chill 
Response (``Supplemental Deposit Chill Response'').\42\ The issuer is 
limited in the Supplemental Deposit Chill Response to demonstrating 
that (1) it did submit the Deposit Chill Response or Additional 
Information Response, if applicable, within the required time frame, or 
(2) DTC made a clerical mistake or a mistake arising from an oversight 
or omission in reviewing the Deposit Chill Response [or Additional 
Information Response, if applicable].\43\ If an issuer submits a 
Supplemental Deposit Chill Response, the Officer will provide the 
issuer with a written decision (``Supplemental Deposit Chill Response 
Decision'') within ten Business Days of its submission.
---------------------------------------------------------------------------

    \42\ Proposed Rule 22(A)(c)(iii).
    \43\ Proposed Rule 22(A)(c)(iii).
---------------------------------------------------------------------------

6. The Record
    The record for purposes of any appeal to the Commission will be 
comprised of:
     The Deposit Chill Notice, the Deposit Chill Response, the 
Deposit Chill Decision, the Supplemental Deposit Chill Response, the 
Supplemental Deposit Chill Response Decision, the Additional 
Information Request, and the Additional Information Response;
     All documents submitted in connection with the items 
listed immediately above and;
     Any written communications created pursuant to Proposed 
Rule 22(A)(3)(b)(iv), as described below.\44\
---------------------------------------------------------------------------

    \44\ Proposed Rule 22(A)(b)(3)(iv).
---------------------------------------------------------------------------

7. Waiver of Right To Make Submission
    If an issuer does not comply with any deadline set pursuant to Rule 
22(A) or in a Deposit Chill Notice, it waives its right to make the 
submission unless DTC expressly waives or extends in writing the period 
for submission.\45\
---------------------------------------------------------------------------

    \45\ Proposed Rule 22(A)(2)(a).
---------------------------------------------------------------------------

8. Reservation of Authority
    Once DTC has imposed a Deposit Chill, Proposed Rule 22(A) does not 
prevent it from lifting or modifying the Deposit Chill ``to prevent 
imminent harm, injury or other such consequences to [DTC] or its 
Participants or where [DTC] otherwise reasonably determines that such 
action is necessary to protect the prompt and accurate clearance and 
settlement of securities transactions through DTC.'' \46\ In addition, 
for those same reasons, DTC may impose a Deposit Chill after providing 
an issuer with a Deposit Chill Notice or Additional Information Request 
but before it has received a Deposit Chill Response or Additional 
Information Response without waiting for the applicable deadline to 
arrive.\47\ In such circumstances, after the Deposit Chill is imposed, 
the procedures in Proposed Rule 22(A)(2)(c) will apply. For example, 
DTC will issue the Deposit Chill Decision with ten Business Days after 
receiving the Deposit Chill Response or the Additional Information 
Response, if applicable.\48\
---------------------------------------------------------------------------

    \46\ Proposed Rule 22(A)(3)(b)(i)(A).
    \47\ Proposed Rule 22(A)(3)(b)(i)(B).
    \48\ Proposed Rule 22(A)(3)(c).
---------------------------------------------------------------------------

    Proposed Rule 22(A) also does not prohibit DTC from communicating 
with an issuer, its transfer agent, or other authorized representative 
known to DTC in connection with a Deposit Chill.\49\ As noted above, 
any such substantive communications will be in writing and part of the 
record for purposes of any appeal to the Commission.
---------------------------------------------------------------------------

    \49\ Proposed Rule 22(A)(3)(b)(iv).
---------------------------------------------------------------------------

9. Method of Delivery of Deposit Chill Notice
    DTC will send the issuer any Deposit Chill Notice via overnight 
courier to the issuer's address in its regulatory filings where it is 
incorporated or otherwise organized. If DTC cannot locate the issuer 
with reasonable diligence, it will send it the issuer's designee for 
service of process or the Secretary of State or any state securities 
agency of the State where the issuer is incorporated or otherwise 
organized. If the issuer is not incorporated or otherwise organized in 
any state, DTC will send them to any similar agent of the jurisdiction 
where the issuer is incorporated or otherwise organized.

B. Proposed Rule 22(B)

1. Scope of Proposed Rule 22(B)
    The procedures in Proposed Rule 22(B) apply to issuers of Eligible 
Securities where DTC imposes or intends to impose a Global Lock \50\ in 
conjunction with either of the following:
---------------------------------------------------------------------------

    \50\ Proposed Rule 22(B)(1).
---------------------------------------------------------------------------

     Judicial Action or Administrative Proceeding: DTC becomes 
aware that the Commission or other federal or state law enforcement or 
regulatory authority has commenced a judicial action or administrative 
proceeding (``Proceeding'') alleging that ``Defendants'' \51\ sold 
Eligible Securities in violation of Section 5 of the Securities Act or 
other applicable law.\52\
---------------------------------------------------------------------------

    \51\ Proposed Rule 22(B) defines ``Defendants'' as a defendant, 
defendants, and other subjects of the action.
    \52\ Proposed Rule 22(B)(1)(a).
---------------------------------------------------------------------------

     Deposit Chill: DTC imposes a Global Lock when an issuer 
does not satisfy the requirements of lifting or not imposing a Deposit 
Chill in Rule 22(A)(2)(c)(ii) and (iii).\53\
---------------------------------------------------------------------------

    \53\ Proposed Rule 22(B)(1)(b).

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

[[Page 16396]]

2. Global Lock Notice
    DTC will send notice of the Global Lock (``Global Lock Notice'') to 
an issuer:
     No later than twenty Business Days prior to the imposition 
of the Global Lock \54\ or;
---------------------------------------------------------------------------

    \54\ Proposed Rule 22(B)(2).
---------------------------------------------------------------------------

     no later than three Business Days after imposition of the 
Global Lock in the event DTC must first impose the Global Lock:
    [cir] ``in order to prevent imminent harm, injury or other such 
consequences to [DTC] or its Participants;'' or
    [cir] if DTC ``reasonably determines that such action is necessary 
to protect the prompt and accurate clearance and settlement of 
securities transactions through [DTC].'' \55\
---------------------------------------------------------------------------

    \55\ Proposed Rule 22(B)(2).
---------------------------------------------------------------------------

    The Global Lock Notice will inform the issuer of the reasons for 
DTC's actions, including the legal authority upon which DTC relies.\56\ 
It will also provide the date the Global Lock was imposed or the date 
it will be imposed should the issuer fail to respond to the Global Lock 
Notice.\57\ With respect to the issuer's response, the Global Lock 
Notice will set forth the following: \58\
---------------------------------------------------------------------------

    \56\ Proposed Rule 22(B)(2)(a)(i).
    \57\ Id.
    \58\ Also included with the Global Lock Notice will be a copy of 
Proposed Rule 22(B). See Proposed Rule 22(B)(2)(a)(iv).
---------------------------------------------------------------------------

3. Global Lock Response
    If the issuer elects to contest the Global Lock, it may submit a 
response (``Global Lock Response'') in the form and containing the 
substance provided in the Global Lock Notice. If the Global Lock Notice 
is based on a Proceeding as described in Proposed Rule 22(B)(1)(a), it 
will contain notice that a Global Lock will not be imposed, or, if 
already imposed, will be released if the issuer demonstrates either (1) 
that the Eligible Securities were not the intended subject of the 
Proceeding, or (2) that the Proceeding was withdrawn or dismissed on 
the merits with prejudice or otherwise resolved in a final, non-
appealable judgment in favor of the Defendants.
    DTC must receive the Global Lock Response with twenty Business Days 
after the date of the Global Lock Notice. However, DTC may extend this 
deadline for up to an additional twenty Business Days if the issuer 
establishes ``good cause.''
4. Global Lock Decision
    If an issuer submits a Global Lock Response, DTC will provide the 
issuer with a written decision (``Global Lock Decision'').\59\
---------------------------------------------------------------------------

    \59\ Proposed Rule 22(B)(c).
---------------------------------------------------------------------------

Timing of Global Lock Decision
    If a Global Lock was imposed prior to the issuance of a Global Lock 
Notice, the Global Lock Decision will be provided within ten Business 
Days after receipt of the Global Lock Response. If a Global Lock was 
not imposed prior to the issuance of a Global Lock Notice, the Global 
Lock Decision will be provided within twenty Business Days after 
receipt of the Global Lock Response.
Effect of Global Lock Decision
    The Global Lock Decision will result in DTC either: (i) Not 
imposing or releasing a Global Lock; or (ii) imposing or not releasing 
a Global Lock on the security. DTC will not impose a Global Lock, or 
will release a Global Lock already in place, if it reasonably 
determines that the Global Lock Response satisfies the requirements set 
forth in the Global Lock Notice.\60\ If DTC reasonably determines that 
the Global Lock Response does not satisfy those requirements, it will 
impose or not release the Global Lock, as applicable.
---------------------------------------------------------------------------

    \60\ Proposed Rule 22(B)(2)(c).
---------------------------------------------------------------------------

5. Release of Global Lock Stemming From a Proceeding
    Proposed Rule 22(B)(3) provides for the release of Global Locks 
imposed pursuant to a Proceeding as set forth in Proposed Rule 
22(B)(1)(a). However, if the safe harbor under Securities Act Rule 144 
is not available to the issuer pursuant to Securities Act Rule 
144(i),\61\ the issuer is not eligible for relief under this 
provision.\62\ For those issuers, the Global Lock will remain in place 
until it complies with the requirements of Securities Act Rule 
144(i)(2).\63\
---------------------------------------------------------------------------

    \61\ See 17 CFR 230.144(i).
    \62\ Proposed Rule 22(B)(3).
    \63\ Id.
---------------------------------------------------------------------------

    For all other issuers, the length of the Global Lock will depend in 
the first instance on whether the issuer is subject to the reporting 
requirements of Sections 13(a) and 15(d) of the Exchange Act. If the 
issuer is subject to such requirements, the Global Lock will be lifted 
six months after the ``Disposition.'' \64\ If the issuer is not subject 
to the reporting requirements, the Global Lock will be lifted one year 
after either the entry of a judicial order or judgment or, if the 
Commission brought an administrative proceeding, the Disposition.\65\
---------------------------------------------------------------------------

    \64\ Proposed Rule 22(B)(3)(b). Proposed Rule 22(b)(3)(a)(ii) 
defines ``disposition'' as ``a final order of the Commission 
pursuant to Rule 360(d)(2) or Rule 411(a) of the Commission's Rules 
of Practice that disposes of the claims against those Defendants 
allegedly responsible for the violations of Section 5 of the 
Securities Act relating to the Eligible Securities.
    \65\ Proposed Rule 22(B)(2)(a)(i) and (ii).
---------------------------------------------------------------------------

    Under Section 3 of Proposed Rule 22(B), an issuer may be required 
to submit a Legal Opinion and/or other evidence or documentation as DTC 
may reasonably require.\66\
---------------------------------------------------------------------------

    \66\ Proposed Rule 22(B)(3)(c). As with a Legal Opinion 
regarding a Deposit Chill Notice, any Legal Opinion an issuer 
submits regarding a Global Local Notice must be in a form and 
substance satisfactory to DTC and be from an independent securities 
counsel reasonably acceptable to DTC. Id.
---------------------------------------------------------------------------

6. Release of a Global Lock Stemming From a Deposit Chill Under 
Proposed Rule 22(A)(2)(c)
    Section 4 of Proposed Rule 22(B) provides for the release of Global 
Locks imposed when an issuer fails to satisfy the requirements for 
lifting a Deposit Chill in Sections 2(c)(ii) and (iii) of Proposed Rule 
22(A). Like Section 3 of Proposed Rule 22(B), the length of the Global 
Lock will depend on whether the issuer is subject to the reporting 
requirements under Section 13 or Section 15(d) under the Exchange Act. 
If the issuer is such a reporting company, the Global Lock will be 
lifted six months after its imposition.\67\ If the issuer is not such a 
reporting company, the Global Lock will be lifted one year after its 
imposition.\68\ As in Section 3 of Proposed Rule 22(B), a Global Lock 
will remain in place for those issuers for which the safe harbor under 
Securities Act Rule 144 would be unavailable pursuant to Rule 144(i) 
until the issuer complies with the requirements of Securities Act Rule 
144(i)(2).\69\
---------------------------------------------------------------------------

    \67\ Proposed Rule 22(B)(4).
    \68\ Id.
    \69\ Id.
---------------------------------------------------------------------------

7. Record
    The record for purposes of any appeal to the Commission consists of 
the Global Lock Notice, the Global Lock Response, and the Global Lock 
Decision.\70\
---------------------------------------------------------------------------

    \70\ Proposed Rule 22(B)(2)(d).
---------------------------------------------------------------------------

8. Waiver of Right To Make Submission
    If an issuer does not comply with any deadline set pursuant to Rule 
22(B) or in a Global Lock Notice, it waives its right to make the 
submission unless DTS expressly waives or extends in writing the period 
for submission.\71\
---------------------------------------------------------------------------

    \71\ Proposed Rule 22(B)(5)(a).
---------------------------------------------------------------------------

9. Reservation of Authority
    Once DTC has imposed a Global Lock, Proposed Rule 22(B) does not 
prevent it from lifting or modifying the Global Lock ``to prevent 
imminent harm, injury or other such consequences to [DTC] or

[[Page 16397]]

its Participants or where [DTC] otherwise reasonably determines that 
such action is necessary to protect the prompt and accurate clearance 
and settlement of securities transactions through [DTC].'' \72\ In 
addition, for those same reasons, DTC may impose a Global Lock after 
providing an issuer with a Global Lock Notice but before it has 
received a Global Lock Response before the applicable deadline.\73\ In 
such circumstances, after the Global Lock is imposed, the procedures in 
Section 2(c) of Proposed Rule 22(B) will apply. For example, DTC will 
issue the Global Lock Decision with ten Business Days after receiving 
the Global Lock Response.\74\
---------------------------------------------------------------------------

    \72\ Proposed Rule 22(B)(5)(b)(i)(A).
    \73\ Proposed Rule 22(A)(5)(b)(i)(B).
    \74\ Proposed Rule 22(B)(5)(c).
---------------------------------------------------------------------------

    Proposed Rule 22(B) also does not prohibit DTC from communicating 
with an issuer, its transfer agent of other authorized representative 
known to DTC in connection with a Global Lock.\75\ As noted above, any 
such substantive communications will be in writing and part of the 
record for purposes of any appeal to the Commission.
---------------------------------------------------------------------------

    \75\ Proposed Rule 22(B)(5)(b)(iv).
---------------------------------------------------------------------------

    In addition, nothing in Proposed Rule 22(B) displaces any legal or 
regulatory requirements that DTC is subject to under applicable law, 
rule or regulation.\76\ If DTC imposes a Global Lock for reasons other 
than those described in Proposed Rule 22(B), it will, however, apply 
the procedures set forth in Proposed Rule 22(B).\77\
---------------------------------------------------------------------------

    \76\ Proposed Rule 22(B)(5)(b)(iii).
    \77\ Id.
---------------------------------------------------------------------------

10. Method of Delivery of Global Lock Notice
    DTC will send the issuer any Global Lock Notice via overnight 
courier to the issuer's address in its regulatory filings where it is 
incorporated or otherwise organized.\78\ If DTC cannot locate the 
issuer with reasonable diligence, it will send them to the issuer's 
designee for service of process or the Secretary of State or any state 
securities agency of the State where the issuer is incorporated or 
otherwise organized.\79\ If the issuer is not incorporated or otherwise 
organized in any state, DTC will send them to any similar agent of the 
jurisdiction where the issuer is incorporated or otherwise 
organized.\80\
---------------------------------------------------------------------------

    \78\ Proposed Rule 22(B)((5)(c).
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

III. Summary of Comments and DTC's Responses

    The Commission received nine comment letters from seven commenters 
on the Proposed Rules. DTC submitted two letters responding to 
comments. The summary of comments and DTC's responses are organized 
into three categories: (i) Notice to issuers, (ii) opportunity to be 
heard, and (iii) fair procedures.\81\
---------------------------------------------------------------------------

    \81\ Two commenters argued about that the scope of the Proposed 
Rules should be broader. Both of these commenters interpret Proposed 
Rule 22(A) to apply only when DTC imposes a Deposit Chill upon 
detecting ``unusually large volumes of deposits of a low priced or 
thinly traded Eligible Security.'' See STA Letter at 3-4; Sichenzia 
Letter I at 3. One of these commenters interprets Proposed Rule 
22(B) to apply only when DTC becomes aware of a judicial or 
administrative proceeding or when an issuer has failed to meet the 
threshold for lifting a Deposit Chill. See Sichenzia Letter at 3. 
DTC responded that the Proposed Rules are broader than the 
commenters' interpretation. See DTC Letter I at 13-14 (citing 
Proposed Rule 22(A)(3)(b)(iii) and Proposed Rule 22(B)(5)(b)(iii)).
    One commenter believes the Proposed Rules should apply to other 
persons using DTC's services, including transfer agents. See STA 
Letter at 7-8.
---------------------------------------------------------------------------

A. Notice to Issuers

1. Comments Regarding Meaning of ``Imminent Harm''
    One commenter believes that DTC's ability to impose a Deposit Chill 
or Global Lock ``to prevent imminent harm, injury or other such 
consequences to [DTC] or its Participants, or where [DTC] otherwise 
reasonably determines that such action is necessary to protect the 
prompt and accurate clearance and settlement of securities transactions 
through [DTC]'' is overly broad, ripe for abuse, and has the potential 
to render the advance notice procedure meaningless.\82\
---------------------------------------------------------------------------

    \82\ See Sichenzia Letter I at 4.
---------------------------------------------------------------------------

    Commenters also question what constitutes ``imminent harm'' and 
requests that DTC clarify the term.\83\ One commenter believes DTC 
should be required to clearly outline the minimum showing of imminent 
harm that would be needed to justify the imposition of a restriction 
prior to providing the issuer with notice.\84\ This commenter requests 
that DTC develop procedures for an expedited proceeding that should 
mirror FINRA Rule 9552.\85\ One commenter does not believe that Section 
17A authorizes DTC to restrict an issuer's access to its facilities 
without prior notice.\86\
---------------------------------------------------------------------------

    \83\ See Sichenzia Letter I at 4; Kogan Letter at 3.
    \84\ See Kogan Letter at 3.
    \85\ See Kogan Letter at 3.
    \86\ See Kogan Letter at 2.
---------------------------------------------------------------------------

    One commenter does not believe that the Proposed Rules require DTC 
to articulate what the ``imminent harm'' is in the Deposit Chill 
Notice, but rather only provide notice of the restriction and the 
reasons for the restriction. The commenter recommends that DTC be 
required to articulate the potential risks and who faces those 
risks.\87\
---------------------------------------------------------------------------

    \87\ See Kogan Letter at 3.
---------------------------------------------------------------------------

    DTC responds that it ``has provided meaningful standards to justify 
imposition of restrictions in those cases where prior notice is not 
feasible.'' \88\ It cites to International Power where the Commission 
stated that DTC may impose restrictions prior to providing notice 
``[i]f DTC believes that circumstances exist that justify imposing an 
suspension of services with respect to an issuer's securities in 
advance of being able to provide the issuer with notice and an 
opportunity to be heard on the suspension.'' The Commission further 
stated that DTC may act to avoid imminent harm, but it must then 
provide ``expedited fair process to the affected issuer.'' \89\
---------------------------------------------------------------------------

    \88\ See DTC Letter I at 8.
    \89\ Int'l Power, 2012 SEC LEXIS 844, at *29.
---------------------------------------------------------------------------

    DTC explains that ``[w]hen its monitoring system detects that 
Participants may be in the process of currently and consistently 
depositing ineligible securities into the system, DTC may impose a 
Deposit Chill without prior notice to stop further deposits of such 
ineligible securities.'' \90\ It also believes that Rule 22(A) provides 
issuers with expedited fair process. Based on its experience using the 
procedures in the Proposed Rule Change over the past months, DTC notes 
that in the ``majority of cases'' it has provided notice to issuers 
prior to imposing a Deposit Chill.\91\
---------------------------------------------------------------------------

    \90\ See DTC Letter I at 9.
    \91\ See DTC Letter I at 9.
---------------------------------------------------------------------------

    With respect to Global Locks, DTC believes it is able to institute 
them as soon as possible once the Commission alleges that the proffered 
exemption and all other possible exemptions are not applicable.\92\ As 
with Deposit Chills, over the past months DTC has provided notice to 
issuers prior to imposing a Global Lock in a majority of cases.\93\
---------------------------------------------------------------------------

    \92\ See DTC Letter I at 9.
    \93\ See DTC Letter I at 9.
---------------------------------------------------------------------------

2. Comments Regarding the Deposit Chill Notice
    One commenter believes that in order for issuers to have the 
opportunity to fully understand and respond to the issues raised in the 
Deposit Chill Notice, DTC must provide in the Deposit Chill Notice the 
reasons for the Deposit Chill or Global Lock in light of DTC's 
Eligibility Requirements.\94\ DTC responds that the Proposed Rule 
change requires the Deposit Chill Notice and the Global Lock Notice to 
contain the

[[Page 16398]]

reasons for the service restriction and provide the required form of 
response.\95\
---------------------------------------------------------------------------

    \94\ See STA Letter at 4.
    \95\ See DTC Letter I at 12.
---------------------------------------------------------------------------

    One commenter believes that the named transfer agent of an issuer 
should also receive the Deposit Chill Notice and the Global Lock 
Notice. This commenter states that providing notice to the transfer 
agent would allow it to protect the interests of other registered 
shareholders of the issuer, as well as its own interests.\96\ Another 
commenter does not believe that notice to a transfer agent is 
reasonably calculated to provide notice to the issuer, and instead 
suggests notice be given to the registered agent for service of process 
or the Secretary of State in the state of incorporation.\97\
---------------------------------------------------------------------------

    \96\ See STA Letter at 6. This commenter stated that the 
Commission has increasingly sought to impose obligations on transfer 
agents in this area and has expressed that transfer agents may fact 
liability under Section 5 of the Securities Act in some 
circumstances.
    \97\ See Kogan Letter at 4.
---------------------------------------------------------------------------

    One commenter also believes that DTC should give contemporaneous 
notice to the Commission. It believes this is necessary in order for 
the issuer to be able to seek a ``stay of the restriction.'' \98\ DTC 
responds that it does not need to replicate in its rules the 
Commission's Rules of Practice.\99\ Another commenter believes that DTC 
should be required to notify law enforcement if it notices ``a pattern 
by depositors.'' \100\
---------------------------------------------------------------------------

    \98\ See Kogan Letter at 3.
    \99\ See DTC Letter I at 12 (citing Rule 420(b) of the 
Commission's Rule of Practice, 17 CFR 201.420).
    \100\ See Shatto Letter at 1.
---------------------------------------------------------------------------

B. Opportunity To Be Heard

1. Comments Requesting an Opportunity for an In-Person Hearing and 
Internal Appeal
    Three commenters believe that Section 17A of the Exchange Act 
requires DTC to provide affected issuers the opportunity to request a 
hearing to appeal the decision to institute a Deposit Chill or Global 
Lock within DTC.\101\ Commenters cite to other SRO rules that afford 
affected parties the opportunity for a hearing in similar contexts, 
specifically, FINRA Rule 6490 and NASDAQ Rule 5815.\102\
---------------------------------------------------------------------------

    \101\ See STA Letter at 5; Sichenzia Letter I at 2; Sichenzia 
Letter II at 2; Kogan Letter at 4-5. One of these commenters 
requests ``a hearing or an internal appeals process that is 
meaningful.'' See Sichenzia Letter II at 2.
    \102\ See STA Letter at 5; Sichenzia Letter II at 2.
---------------------------------------------------------------------------

    Commenters also note that DTC Rule 22 permits issuers to contest 
any decision to deny their status as an Eligible Security by filing a 
request for a hearing. Such a hearing takes place before three members 
of a panel selected by the Chairman of the Board of the Depository 
Trust and Clearing Corporation, the parent company of DTC, from a pool 
of persons employed by or partners of Participants.\103\ One commenter 
notes that in the event that an issuer is subject to a Deposit Chill or 
a Global Lock, the effect of that decision by DTC is the same as though 
it has been denied status as an Eligible Security. As a result, this 
commenter argues that issuers should be afforded a hearing, just as 
they are under Rule 22.\104\
---------------------------------------------------------------------------

    \103\ See STA Letter at 5; Sichenzia Letter I at 3.
    \104\ See STA Letter at 5. Commenters recommend allowing issuers 
to use the hearing process outlined in Rule 22. See STA Letter at 5; 
Sichenzia Letter I at 3. One of these commenters also recommends 
Rule 22 be amended to provide that the three person panels that hear 
appeals from decisions made by DTC be comprised of one person that 
is employed by, or a partner of, a registered transfer agent. See 
STA Letter at 5-6.
---------------------------------------------------------------------------

    Another commenter similarly believes issuers must be afforded a 
hearing like those provided under DTC Rule 22.\105\ This commenter 
believes the Commission thought the issuer in International Power 
should have been given a hearing, although the commenter notes the 
Commission never held that DTC is required to provide a hearing.\106\ 
The commenter points to the following statement from the Commission's 
opinion: ``DTC has not articulated an adequate rationale for providing 
a hearing to an issuer for whose securities DTC will provide no 
service, but not to an issuer whose securities are denied those 
clearance and settlement services that go to the heart of DTC's role as 
a clearing agency.'' \107\ The commenter also believes that the 
Commission's references to FINRA Rule 9558, which requires a hearing, 
supports its position that the Commission intended for DTC to provide 
issuers a hearing.\108\
---------------------------------------------------------------------------

    \105\ See Sichenzia Letter II at 2.
    \106\ See Sichenzia Letter II at 2.
    \107\ See Sichenzia Letter II at 2 (citing Int'l Power, 2012 SEC 
LEXIS 844, at *20).
    \108\ See Sichenzia Letter II at 2.
---------------------------------------------------------------------------

    In response to these comments, DTC states that while Section 
17A(b)(3)(H) requires DTC to provide persons with fair procedures when 
restricting services and Section 17A(b)(5)(B) requires that fair 
procedures include notice and an opportunity to be heard, nothing in 
17A requires DTC to provide issuers with an in-person testimonial 
hearing.\109\ DTC also provides that the Commission's opinion in 
International Power did not specify the procedures DTC should apply, 
but rather stated that DTC should ``adopt procedures that accord with 
the fairness requirements of Section 17A(b)(3)(H), which may be applied 
uniformly in any future such cases.'' \110\ DTC also notes that even 
though the Commission refers to DTC Rule 22 in International Power, it 
did not state that DTC should apply those procedures when instituting 
Deposit Chills or Global Locks.\111\
---------------------------------------------------------------------------

    \109\ See DTC Letter I at 2-3.
    \110\ Id.
    \111\ Id.
---------------------------------------------------------------------------

    With respect to the procedures in FINRA Rule 6490 and NASDAQ Rule 
5815, DTC responds that it has a different role in the securities 
industry than FINRA and NASDAQ.\112\ It notes that FINRA and NASDAQ 
have disciplinary and adjudicatory mandates ``to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade. . . .'' \113\ DTC provides that it ``does not 
perform a policing function to root out fraudulent and manipulative 
conduct in violation of the securities laws.'' \114\ DTC therefore 
concludes that ``[t]here is no basis to compare FINRA and NASDAQ's 
adjudicatory procedures arising from their policing functions with the 
fair procedures provided by DTC for compliance with its eligibility 
standards.'' \115\
---------------------------------------------------------------------------

    \112\ See DTC Letter I at 5.
    \113\ See DTC Letter I at 5 (citing Exchange Act Sections 
15A(b)(6) and 6(b)(5)).
    \114\ See DTC Letter I at 5.
    \115\ See DTC Letter I at 5. DTC also characterizes FINRA Rule 
6490 and NASDAQ Rule 5815 as ``appeals from fact-intensive 
determinations.'' It contrasts this with the Proposed Rule Change, 
which it states does not contemplate that DTC will engage in 
independent fact finding. See DTC Letter I at 7.
---------------------------------------------------------------------------

    With respect to commenter's assertions that the Commission's 
opinion in International Power, and specifically its references to 
FINRA Rule 9558, indicates a hearing is required, DTC notes the 
Commission's statement that ``DTC may design such processes in 
accordance with its own internal needs and circumstances.'' \116\ In 
addition, DTC provides that the reference to FINRA Rule 9558 was 
regarding notice and expedited fair process where action is necessary 
to avoid imminent harm.\117\
---------------------------------------------------------------------------

    \116\ See DTC Letter II at 2.
    \117\ See DTC Letter II at 2.
---------------------------------------------------------------------------

2. Comments Regarding Due Process
    One commenter questions whether DTC's procedures provide issuers 
with due process, and specifically the ``opportunity to present its 
objections to the allegations that form the justification for the 
restriction.'' \118\ It believes DTC should allow the issuer to 
``litigate'' the issues raised in the regulatory

[[Page 16399]]

proceeding that forms the basis of a Global Lock.\119\
---------------------------------------------------------------------------

    \118\ See Kogan Letter at 4.
    \119\ See Kogan Letter at 4.
---------------------------------------------------------------------------

    DTC responds by stating that Section 17A establishes its 
obligations, not the Fourteenth Amendment's due process clause.\120\ It 
further states that even if due process standards did apply, the 
Proposed Rules meets those standards; due process does not require an 
evidentiary or in-person hearing.\121\
---------------------------------------------------------------------------

    \120\ See DTC Letter I at 4.
    \121\ Id.
---------------------------------------------------------------------------

C. Fair Procedures

1. Comment Regarding Requirement To Provide a Legal Opinion
    One commenter is concerned that Proposed Rule 22(A) gives DTC the 
authority to require a Legal Opinion covering any issuer security 
deposited at any time rather than only those securities deposited over 
the specific time frames that are the subject of concern.\122\ This 
commenter states that this open-ended inquiry imposes an unfair burden 
on issuers.\123\
---------------------------------------------------------------------------

    \122\ See Sichenzia Letter I at 5.
    \123\ See Sichenzia Letter I at 5.
---------------------------------------------------------------------------

2. Comments Regarding Disproportionate Burden on Smaller Issuers
    Commenters note that most of the issuers affected by DTC's actions 
with respect to the imposition of a Deposit Chill or Global Lock will 
likely be small and midsize companies, and that Restraints of DTC 
services can dramatically affect the lives of the officers, directors, 
and shareholders of these companies.\124\ For this reason, two 
commenters believe that DTC must ensure a fair process that will reduce 
the likelihood of harm to innocent parties--including the issuer and 
its investors.\125\
---------------------------------------------------------------------------

    \124\ See STA Letter at 2; Sichenzia Letter I at 6.
    \125\ See STA Letter at 2.
---------------------------------------------------------------------------

    One commenter questions why Sections 3 and 4 of Proposed Rule 22(B) 
adversely treats former shell companies and believes they should be 
treated the same as any other public companies.\126\
---------------------------------------------------------------------------

    \126\ See Sichenzia Letter I at 6.
---------------------------------------------------------------------------

3. Comments Regarding Timing for Lifting a Deposit Chill
    One commenter believes that the timing for lifting a Deposit Chill 
as compared to a Global Lock is counter-intuitive.\127\ According to 
this commenter, a Global Lock, which is typically imposed as a result 
of enforcement proceedings, should not be easier to remedy than a 
Deposit Chill, which is usually imposed based on ``mere'' concerns 
regarding a security's eligibility.\128\ The commenter recommends that 
Deposit Chills be lifted automatically after a certain period of 
time.\129\
---------------------------------------------------------------------------

    \127\ See Brilleman Letter at 2.
    \128\ See Brilleman Letter at 2.
    \129\ See Brilleman Letter at 2.
---------------------------------------------------------------------------

    One commenter is concerned that the Proposed Rules do not address 
cases of issuers whose securities were subjected to a Deposit Chill 
prior to the Commission's opinion in International Power.\130\ This 
commenter suggests Deposit Chills imposed prior to International Power 
be lifted after a certain period of time or DTC should follow 
procedures to make a ``fairness determination'' based on the facts and 
circumstances of a particular case.\131\ In its response, DTC states 
that if an issuer whose securities were restricted prior to 
International Power requests a review, DTC has been following the 
procedures in the Proposed Rules.\132\
---------------------------------------------------------------------------

    \130\ See Brilleman Letter at 1.
    \131\ See Brilleman at 1.
    \132\ See DTC Letter I at 13.
---------------------------------------------------------------------------

4. Comments Regarding Timing for Lifting a Global Lock
    Under Proposed Rule 22(B), the trigger for releasing a Global Lock 
is the resolution of the regulatory matter in a judicial order or an 
administrative decision (or some other indication that the issuer was 
incorrectly identified in the Proceeding). One commenter believes this 
standard is not workable because matters instituted by regulatory 
agencies may not be resolved for many years, if at all, may not be 
resolved in a formal fashion, and may be resolved only regarding some 
Defendants or some claims.\133\ The commenter recommends that issuers 
affected by a Global Lock or a Deposit Chill should be permitted to 
apply to DTC one year after the imposition of any Deposit Chill or 
Global Lock to have their affected securities declared Eligible 
Securities.\134\ This application could include a Legal Opinion that 
DTC may rely upon, and DTC could afford issuers a hearing under DTC 
Rule 22 should DTC determine not to release the relevant restriction 
based on the Legal Opinion.\135\
---------------------------------------------------------------------------

    \133\ See STA Letter at 6.
    \134\ See STA Letter at 7.
    \135\ See STA Letter at 7.
---------------------------------------------------------------------------

    Another commenter argued that the timing for the release of a 
Global Lock is too long and stated ``it would be a near miracle if a 
public company in need of working capital were able to survive through 
years of being subject to a [G]lobal [L]ock.'' \136\ This commenter 
recommended lifting a Global Lock six months or one year after the 
commencement of an enforcement proceeding, and believes at such time 
the burden is on the Commission to take action to suspend any further 
trading in the issuer's securities.\137\
---------------------------------------------------------------------------

    \136\ See Sichenzia Letter I at 5.
    \137\ See Sichenzia Letter I at 5.
---------------------------------------------------------------------------

5. Comments Regarding Public Notice of Deposit Chills and Global Locks
    Two commenters recommend that DTC make a list of companies subject 
to Deposit Chills and Global Locks publicly available on its Web 
site.\138\ Commenters stated that issuers subject to these restrictions 
often do not inform their shareholders or potential investors and at 
times issuers misrepresent the reasons for the imposition of the 
restrictions in order to continue raising capital.\139\ These 
commenters also believe publicizing which issuers are subject to DTC 
restrictions would deter future fraudulent securities sales and protect 
investors.\140\
---------------------------------------------------------------------------

    \138\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1; DTCC 
BigBake Letter II at 1.
    \139\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1.
    \140\ See Hamilton Letter at 1; DTCC BigBake Letter I at 1.
---------------------------------------------------------------------------

    One investor also states that publication of issuer and DTC 
responses would be beneficial to shareholders and potential 
investors.\141\ Another commenter requests the publication of Legal 
Opinions, arguing that this would reduce the number of restrictions and 
reduce the impact on the market.\142\
---------------------------------------------------------------------------

    \141\ See Hamilton Letter at 1.
    \142\ See DTCC BigBake Letter I at 2.
---------------------------------------------------------------------------

    DTC states that while it understands commenters concerns, it is the 
issuer's responsibility to decide whether to disclose all of this 
information.\143\ DTC issues an Important Notice when imposing a Global 
Lock and those Important Notices are published on DTC's Web site.\144\ 
In its response, DTC provides that it is considering whether similar 
disclosures regarding Deposit Chills would be appropriate.\145\
---------------------------------------------------------------------------

    \143\ See DTCC Letter at 12.
    \144\ See DTCC Letter at 12.
    \145\ See DTCC Letter at 12.
---------------------------------------------------------------------------

6. Comment Regarding Persons Authorized To Initiate Process and Make 
Final Determinations
    One commenter expressed concern over the number of individuals who 
would be ``Officers'' under the Proposed Rules, and thus able to make 
decisions to deny an issuer access to DTC.\146\ This commenter stated 
any such decisions ``should be given serious and formal consideration 
by senior, experienced professionals that are familiar with securities 
markets and the federal

[[Page 16400]]

securities laws, and that have the authority and independent to make 
decisions.'' \147\ With respect to independence, this commenter 
recommends that an Officer making these decisions should be in a 
separate reporting line or senior to the Officer who made the initial 
decision. Along these lines, the commenter believes the Board of 
Directors should appoint specific officers to review issuer responses 
and make decisions.\148\
---------------------------------------------------------------------------

    \146\ See STA Letter at 4.
    \147\ See STA Letter at 4.
    \148\ See STA Letter at 4.
---------------------------------------------------------------------------

    In its response to these comments, DTC notes that DTC Officers are 
by definition ``high ranking and charge with substantial 
responsibility.'' \149\ In addition, DTC believes the reviewing Officer 
is independent because it was not involved in the decision to impose 
the restriction in the first instance.\150\
---------------------------------------------------------------------------

    \149\ See STA Letter at 11.
    \150\ See STA Letter at 11.
---------------------------------------------------------------------------

    One commenter recommends that the Proposed Rules be amended to 
require that the initiation of an action to impose Deposit Chills 
should be authorized by senior Officers of DTC designated by the Board 
of Directors, or the Chief Executive Officer, to take such 
actions.\151\ DTC believes this is unnecessary because a senior-level 
committee of officers from DTC's Operations, Risk Management, Product 
Management, Application Development and Maintenance, Legal and 
Compliance currently make, and will continue to make, the decision to 
impose service restrictions.\152\
---------------------------------------------------------------------------

    \151\ See STA Letter at 4.
    \152\ See DTC Letter I at 11.
---------------------------------------------------------------------------

IV. Description of Amendment No. 1

    As noted above, one commenter requested that DTC send the Deposit 
Chill Notice to the issuer's transfer agent in addition to the issuer 
itself.\153\ Amendment No. 1 incorporates this requirement into the 
Proposed Rules and provides that DTC will send a copy of the Deposit 
Chill Notice to the issuer's transfer agent via overnight courier.
---------------------------------------------------------------------------

    \153\ See STA Letter at 6.
---------------------------------------------------------------------------

V. Description of Amendment No. 2

    Amendment No. 2 makes a number of clarifying revisions to the 
Proposed Rules to more accurately reflect their intended operation.
    First, DTC proposes to amend Proposed Rules 22(A)(2)(A)(i) to 
clarify that when the Deposit Chill Notice is sent prior to the 
imposition of a Deposit Chill, the date included as the date the 
Deposit Chill will be imposed sets forth the date in circumstances in 
which the issuer does not respond to the Deposit Chill Notice in the 
time or manner provided in the Proposed Rules.
    Second, DTC proposes to amendment Proposed Rule 22(A)(2)(A)(iv) to 
clarify that DTC may extend the date for an issuer to submit a Deposit 
Chill Response ``up to'' an additional twenty Business Days.
    Third, DTC proposes to revise Proposed Rule 22(A)(2)(c) to provide 
when the issuer fails to comply with a deadline in connection with an 
Additional Information Request, DTC will provide the issuer with a 
Deposit Chill Decision within twenty Business Days after the missed 
deadline.
    Fourth, DTC proposes to clarify that the Additional Information 
Request and the Additional Information Response are part of the record 
for purposes of any issuer appeal to the Commission under Proposed Rule 
22(A)(2)(d).
    Fifth, DTC proposes to amend Proposed Rule 22(A)(3)(a), which 
provides that unless the DTC expressly waives or extends in writing the 
applicable period for a submission of a Deposit Chill Response, an 
issuer waives the right to make the submission for which the deadline 
has passed. DTC's amendment would revise this section so that the 
reference to a DTC waiver relates to the applicable period for any type 
of submission provided for under Proposed Rule 22(A) and not only to a 
Deposit Chill Response.
    Sixth, DTC proposes to amend Proposed Rule 22(A)(3)(c) to correct 
the reference to ``Deposit Chill Response'' by replacing it with 
``Deposit Chill Decision.''
    Seventh, among the criteria for determining the application of the 
procedures provided under Proposed Rule 22(B), Section 1(b) provides 
that the procedures will apply where a Global Lock has been imposed as 
a result of an issuer's failure to satisfy the requirements for lifting 
a Deposit Chill in Proposed Rule 22(A)(2)(c). DTC proposes to amend 
Proposed Rule 22(B)(1)(b) to clarify that the procedures in Proposed 
Rule 22(B) will also apply where an issuer has failed to satisfy the 
requirements for not imposing a Deposit Chill.
    Eighth, DTC proposes to amend Proposed Rules 22(B)(2)(a)(i) to 
clarify that when the Global Lock Notice is sent prior to the 
imposition of a Global Lock, the date included as the date the Global 
Lock will be imposed sets forth the date in circumstances in which the 
issuer does not respond to the Global Lock Notice in the time or manner 
provided in the Proposed Rules.
    Ninth, DTC proposes to amend Proposed Rule 22(B)(2)(a)(iii) to 
clarify that DTC may extend the date for an issuer to submit a Global 
Lock Response ``up to'' an additional twenty Business Days.
    Tenth, DTC proposes to amend Proposed Rule 22(B)(2)(c) to provide 
in the case of a Global Lock imposed before issuance of the Global Lock 
Notice, DTC will provide the issuer with a Global Lock Decision within 
ten Business Days after receipt of the Global Lock Response, rather 
than within ten Business Days after imposition of the Global Lock.
    Eleventh, DTC proposes to amend Proposed Rule 22(B)(2)(c) to 
clarify that, in the event that DTC reasonably determines that a Global 
Lock Response does not satisfy the requirements of the Global Lock 
Notice, in addition to not releasing a Global Lock that is already in 
place in, DTC will also impose a Global Lock if one is not yet in 
place.
    Twelfth, DTC proposes to add a new provision providing that if DTC 
imposes a Global Lock pursuant to Proposed Rule 22(B)(5)(b) that the 
procedures contained in Proposed Rule 22(B) will apply, including that 
DTC will provide a Global Lock Decision within ten Business Days after 
it receives the Global Lock Response.

VI. Proceedings To Determine Whether to Approve or Disapprove SR-DTC-
2013-11 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act to determine whether the Proposed Rules should 
be approved or disapproved. As noted above, institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, the Commission seeks and 
encourages interested persons to comment on the Proposed Rule as set 
forth in Amendment Nos. 1 and 2, and provide the Commission with 
arguments to support the Commission's analysis as to whether to approve 
or disapprove the proposal, as amended.
    Pursuant to Section 19(b)(2)(B) of the Exchange Act,\154\ the 
Commission is providing notice of the grounds for disapproval under 
consideration. In particular, Section 17A(b)(3)(H) requires, among 
other things, that the rules of a clearing agency provide a fair 
procedure when the clearing agency prohibits or limits access to the 
clearing agency's services to a person.\155\ In addition, Section 
17A(b)(5) of the Exchange Act requires clearing agencies, when 
determining whether to deny or

[[Page 16401]]

limit access to its services, (i) to give persons in any proceeding an 
opportunity to be heard upon the specific grounds for the denial, 
prohibition, or limitation, and (ii) to keep a record of those 
proceedings.\156\
---------------------------------------------------------------------------

    \154\ 19 15 U.S.C. 78s(b)(2)(B).
    \155\ 15 U.S.C. 78q-1(b)(3)(H).
    \156\ 15 U.S.C. 78q-1(b)(5).
---------------------------------------------------------------------------

    As noted above, commenters raised concerns as to whether the 
Proposed Rules are consistent with the requirements to provide ``fair 
procedures,'' ``notice'' and ``an opportunity to be heard.'' The 
Commission believes that question remain as to whether the Proposed 
Rules are consistent with the requirements of the Exchange Act.
    Section 19(b)(2)(B) of the Act provides that proceedings to 
determine whether to approve or disapprove a proposed rule change must 
be concluded within 180 days of the date of publication of notice of 
the filing of the proposed rule change. The time for conclusion of the 
proceedings may be extended for up to an additional 60 days if the 
Commission finds good cause for such extension and publishes its 
reasons for so finding or if the self-regulatory organization consents 
to the extension.

VII. Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their views, data, and arguments with respect to the 
concerns identified above, as well as any others they may have with the 
Proposed Rules, as amended. In particular, the Commission invites the 
written views of interested persons concerning whether the Proposed 
Rules, as modified by Amendment Nos. 1 and 2, are inconsistent with 
Sections 17A(b)(3)(H) and 17A(b)(5) or any other provision of the 
Exchange Act, or the rules and regulations thereunder.
    Although there do not appear to be any issues relevant to approval 
or disapproval which would be facilitated by an oral presentation of 
views, data, and arguments, the Commission will consider, pursuant to 
Rule 19b-4, any request for an opportunity to make an oral 
presentation.\157\ Interested persons are invited to submit written 
data, views, and arguments on or before April 15, 2014. Any person who 
wishes to file a rebuttal to any other person's submission must file 
that rebuttal on or before April 29, 2014. Comments may be submitted by 
any of the following methods:
---------------------------------------------------------------------------

    \157\ Section 19(b)(2) of the Exchange Act, as amended by the 
Securities Acts Amendments of 1975, Public Law 94-29, 89 Stat. 97 
(1975), grants the Commission flexibility to determine what type of 
proceeding--either oral or notice and opportunity for written 
comments--is appropriate for consideration of a particular proposal 
by a self-regulatory organization. See Securities Acts Amendments of 
1975, Report of the Senate Committee on Banking, Housing and Urban 
Affairs to Accompany S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 
30 (1975).
---------------------------------------------------------------------------

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-DTC-2013-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2013-11. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of DTC and on DTC's 
Web site at http://dtcc.com/en/legal/sec-rule-filings.aspx. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.
    All submissions should refer to File Number SR-DTC-2013-11 and 
should be submitted on or before April 15, 2014. If comments are 
received, any rebuttal comments should be submitted on or before April 
29, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\158\
---------------------------------------------------------------------------

    \158\ 17 CFR 200.30-3(a)(57).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06459 Filed 3-24-14; 8:45 am]
BILLING CODE 8011-01-P