Document ID: SEC-2012-1315-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2012-08-10T04:00Z

[Federal Register Volume 77, Number 155 (Friday, August 10, 2012)]
[Notices]
[Pages 47898-47899]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-19579]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67599; File No. SR-DTC-2012-03]

Self-Regulatory Organizations; the Depository Trust Company; 
Notice of Filing of Amendment No. 1 and Order Granting Accelerated 
Approval of a Proposed Rule Change, as Modified by Amendment No. 1, To 
Implement a Change in the Practices of the Depository Trust Company as 
They Relate to Post-Payable Adjustments

August 6, 2012.

I. Introduction

    On April 25, 2012, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change SR-DTC-2012-03 pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ The proposed rule change 
was published for comment in the Federal Register on May 5, 2012.\2\ 
The Commission received three comment letters on the proposal.\3\ On 
June 11, 2012, DTC requested an extension to the deadline for action on 
the proposed rule change by the Commission and August 6, 2012 was 
designated as the new date by which the Commission would be required to 
take action. On July 26, 2012, DTC filed Amendment No. 1 to the 
proposed rule change (``Amendment No. 1''). The Commission is 
publishing this notice and order to solicit comments on the proposed 
rule change, as modified by Amendment No. 1, and to approve the 
proposed rule change, as modified by Amendment No.1, on an accelerated 
basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 34-66894 (May 1, 2012), 
77 FR 26796 (May 5, 2012).
    \3\ Letter from Dan W. Schneider, Counsel and Secretariat to The 
Association of Global Custodians, to Elizabeth M. Murray (sic), 
Secretary, Commission (May 29, 2012); letter from Cristeena G. 
Nasser, Senior Counsel, Center for Securities, Trust & Investments, 
American Bankers Association, to Elizabeth M. Murphy, Secretary, 
Commission (May 31, 2011); and letter from Stephen M. Renna, Chief 
Executive Officer, CRE Financial Council, to Elizabeth M. Murray 
(sic), Secretary, Commission (June 29, 2012).
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II. Description of the Proposal

    Historically, DTC has accommodated issuers and/or their agents 
(``Paying Agents'') by facilitating the collection and, in many cases, 
the reallocation of certain misapplied, misdirected, or miscalculated 
principal and income payments (``P&I'').\4\ Under today's practices, 
these types of post-payable adjustments can occur up to one year after 
the initial payment is made. As more fully discussed below, DTC has 
proposed a change in practice, which will allocate assignment of 
accountability appropriately and mitigate risk associated with the 
reallocation of such P&I.
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    \4\ P&I include Principal Pass-Thru payments, Full Calls, 
Partial Calls, Maturities, Pre-Refundings and all interest and 
dividend payments.
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Background

    Several years ago, DTC formed a cross-industry working group to 
study the severity of P&I processing problems and to analyze possible 
solutions. The working group at that time focused mainly on the 
timeliness of rate information submitted to DTC by Paying Agents and 
recommended several changes to DTC's Operational Arrangements. Those 
changes were approved by the Commission and implemented in 2008 (``2008 
Changes'').\5\ Implementation of the 2008 Changes resulted in a 75% 
decrease in late submission of rate information and a significant 
increase in the allocation of P&I on payment date. More recently, the 
working group has suggested that, among other things, DTC create a time 
limit for processing post-payable adjustments received from Paying 
Agents.
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    \5\ Securities Exchange Act Release Numbers 34-57542 (March 20, 
2008) 73 FR 16403 (March 27, 2008) (File No. SR-DTC-07-11).
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    Under current practice, DTC will process post-payable adjustments 
received from Paying Agents for up to one year after the initial 
payment is made. After DTC processes the debits and credits for the 
misapplied P&I, DTC participants must process trade adjustments against 
any customer who traded the security since the error occurred. 
Participants must also process adjustments to their customers' accounts 
for the misapplied principal and associated interest. DTC has been 
requested a number of times by the Association of Global Custodians 
(``AGC'') to focus more closely on the risks associated with income 
adjustments and to look for ways to reduce that risk.\6\
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    \6\ In fact, AGC's recommendation was to adopt a new practice in 
which DTC would state that: (i) misapplied, misdirected, or 
miscalculated principal payments must be reversed within two 
business days after the initial payment; and (ii) misapplied, 
misdirected, or miscalculated interest payments and cash dividend 
payments must be reversed within seven business days after payment. 
However, at this time, DTC is establishing an interim policy, which 
will put it closer to such an end state.
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The Proposed Changes

    In an effort to mitigate the risks associated with post-payable 
adjustments, DTC created the Post Payable Adjustment Task Force (``Task 
Force''). The Task Force is made up of Paying Agents and representative 
members of the AGC, the American Bankers Association, and the Corporate 
Actions division of the Securities Industry and Financial Markets 
Association. The Task Force has reviewed the current payments 
environment and proposed changes that will both reduce the volume of 
post-payable adjustments and the risks inherent in processing these 
adjustments in the future. The open participation by all segments of 
the industry has started to bring greater transparency to both 
challenges and pain points, which affect the entire industry. DTC 
recognizes that solutions will require some time to implement and for 
that reason is proposing the following staggered implementation plan, 
which has been approved by the Task Force:
    1. Effective January 1, 2013:
    a. DTC will require that all new issues submitted to DTC for issue 
eligibility

[[Page 47899]]

include details on the servicer and calculating agent.
    b. DTC will require that all post-payable adjustment requests 
include the root cause adjustment code and information identifying 
issuance date, instrument, issuer, servicer, and calculating agent. DTC 
will not process any post-payable adjustments missing these key 
details.
    2. Effective July 1, 2013, DTC will begin tracking and making 
publicly available reports on issuer performance as it relates to post-
payable adjustments in the form of a report card.
    3. Effective January 1, 2014, DTC will no longer process post-
payable adjustment requests through the settlement system beyond 180 
calendar days after the initial payment date.
    4. Effective July 1, 2014, DTC will no longer process post-payable 
adjustment requests through the settlement system beyond 120 calendar 
days after the initial payment date.
    5. Effective January 1, 2015, DTC will no longer process post-
payable adjustment requests through the settlement system beyond 90 
calendar days after the initial payment date.\7\
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    \7\ These changes have been reviewed in detail with the Task 
Force and the Task Force has agreed to the proposed changes.
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    Additionally, DTC has agreed to work with the industry to 
investigate the development and potential operation of an industry 
proposed adjustment claims repository (``Adjustment Claims 
Repository''). The Adjustment Claims Repository would address the 
collection and redistribution of misapplied and/or misdirected P&I 
between issuers and/or Paying Agents and the participants holding the 
affected securities beyond DTC's proposed post-payable adjustment cut-
off periods. The proposed implementation dates set forth in this order 
for the timeframes within which DTC will process post-payable 
adjustments may be reevaluated if this process requires significant 
investment by DTC and the industry. DTC will revise those effective 
dates in a new proposed rule change filing, if so determined.
    DTC will continue to service all court-directed adjustments (with 
appropriate supporting documentation), regardless of age. DTC will also 
continue to service other categories of adjustments, which are mutually 
agreed upon by Task Force members as ``uncontrollable'' post-payable 
adjustments, regardless of age.
    Issuers and/or Paying Agents wishing to modify certain P&I beyond 
the time period that DTC will process the adjustments may do so by 
obtaining a ``P&I Allocation Register'' and making adjustments and 
payment arrangements directly with the affected DTC participants.

III. Comment Letters

    The Commission received three comment letters opposing the proposed 
rule change.\8\ In response to the three comment letters, DTC worked 
with the AGC, the American Bankers Association, and the Commercial Real 
Estate Finance Council to draft Amendment 1 to the proposed rule change 
filing. The comment letters mention that the timeframe proposed for 
shortening the window for DTC to process post-payable adjustments is 
overly aggressive. DTC has worked with the Task Force to stagger the 
timeframe for implementation of changes in the processing of post-
payable adjustments through the end of 2014. The comment letters also 
suggested that DTC create an industry working group to review the 
various causes of adjustments and noted that the vast majority of 
adjustments are the result of actions outside the control of Paying 
Agents. In response, DTC created the Task Force, which has reviewed and 
will continue to review the reasons for post-payable adjustments to 
determine the root causes of such adjustments. Once the root causes of 
the adjustments are finally determined, the Task Force will meet to 
create workable solutions to reduce the number of adjustments, 
including working with the industry to look to restructure and simplify 
the legal documentation and post payable adjustments process and 
including an opinion of ``materiality'' as defined under Regulation AB. 
The comment letter from Dan W. Schneider also requested that an 
industry working group design a plan for DTC to administer an 
Adjustment Claims Repository. DTC has agreed to work with the industry 
to investigate the development and potential operation of the proposed 
Adjustment Claims Repository. The Adjustment Claims Repository would 
address the collection and redistribution of misapplied and/or 
misdirected income and principal payments between issuers and/or Paying 
Agents and the participants holding the affected securities beyond 
DTC's proposed post-payable adjustment cut-off periods.
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    \8\ Letters from Dan W. Schneider, Cristeena G. Nasser, and 
Stephen M. Renna, supra note 3.
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    DTC will notify the Commission of any additional comments received 
by DTC.

IV. Discussion

    After careful review of the proposed rule change, as modified by 
Amendment No. 1, and consideration of the comment letters and DTC's 
response, the Commission finds that the proposed rule change is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable, in particular Section 17A.\9\ 
Section 17A(b)(3)(F) of the Act \10\ requires, among other things, that 
the rules of a clearing agency be designed to remove impediments to and 
perfect the mechanism of a national system for the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
finds that limiting the ambiguity surrounding payment finality will 
remove impediments to and perfect the mechanism of a national system 
for the prompt and accurate clearance and settlement of securities 
transactions.
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    \9\ 15 U.S.C. 78q-1.
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act \11\ and the 
rules and regulations thereunder. It is therefore ordered, pursuant to 
Section 19(b)(2) of the Act,\12\ that the proposed rule change (File 
No. SR-DTC-2012-03) be, and hereby is, approved.\13\
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    \11\ 15 U.S.C. 78q-1.
    \12\ 15 U.S.C. 78s(b)(2).
    \13\ In approving the proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-19579 Filed 8-9-12; 8:45 am]
BILLING CODE 8011-01-P