Document ID: SEC-2008-1646-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2008-12-08T05:00Z

[Federal Register: December 8, 2008 (Volume 73, Number 236)]
[Notices]               
[Page 74544-74545]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08de08-95]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59033; File No. SR-DTC-2008-08]

 
Self-Regulatory Organizations; the Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change To Eliminate the 
Ability To Obtain a Physical Certificate From DTC for Issues That Are 
Eligible and Participating in the Direct Registration System

December 1, 2008.

I. Introduction

    On July 9, 2008, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') proposed rule 
change SR-DTC-2008-08 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ Notice of the proposal was published 
in the Federal Register on September 2, 2008.\2\ The Commission 
received two comment letters.\3\ For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 58404 (August 21, 2008), 
73 FR 51326.
    \3\ Letters from Daniel Raider (September 30, 2008) and Candice 
D. Fordin, Associate Counsel, The Depository Trust Company (October 
13, 2008).
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II. Description

    Currently, DTC participants (i.e., broker-dealers and banks) use 
the Withdrawal-by-Transfer (``WT'') service to instruct DTC to have 
securities assets held in the participant's DTC account reregistered in 
the name of an individual investor, a firm, or a third party. The 
reregistered assets can be issued in certificated form or as a DRS 
position.\4\ On receipt of a WT instruction from a participant, DTC 
either (i) sends a certificate the issuer's transfer agent for 
reregistration in the name of the person or entity identified in the WT 
instruction or (ii) instructs the issuer's transfer agent to debit 
DTC's position and issue securities in the name of the person or entity 
identified in the WT instruction.
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    \4\ Issues that participate in the DRS program allow investors 
to hold their assets in DRS book-entry form on the books of the 
issuer.
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    In an effort to further reduce the industry's dependency on 
physical certificates, DTC is eliminating the issuance of physical 
certificates through its WT service for issues that participate in DRS. 
DTC believes this modification of its WT service reaffirms its goals of 
reducing the costs and risk associated with processing physical 
certificates.
    Pursuant to the rule change, beginning January 1, 2009, DTC will no 
longer provide for the issuance of a certificate through the WT service 
if the issue is participating in DRS. Instead, DTC will instruct the 
issuer's transfer agent to establish a DRS position and to provide a 
DRS statement in lieu of a physical certificate. An investor will still 
be able to obtain a physical certificate to the person or entity 
identified in the WT instruction by taking the investor's DRS statement 
directly to the issuer's transfer agent for conversion to a certificate 
or by using DTC's Deposit and Withdrawal at Custodian (``DWAC'') 
process.\5\
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    \5\ DWAC is a method of electronically transferring shares 
between participants and the transfer agent. For more information 
about the DWAC service, see Securities Exchange Act Release No. 
30283 (January 23, 1992), 57 FR 3658 (January 30, 1992) [File No. 
SR-DTC-91-16] (order granting approval of the DWAC service).
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    The rule change will also eliminate a participant's ability to 
obtain a physical certificate through the WT service for issues 
eligible but not participating in DRS on or after July 1, 2009 
(``elimination date''). For the small number of issues anticipated not 
to have become eligible to participate in DRS by the elimination date, 
WT instructions requesting a physical certificate may continue to be 
processed through DWAC or Rush WT processes.
    Additionally, the rule change will eliminate DTC's Direct Mail by 
Depository (``DMD'') service for all issues in the fourth quarter of 
2009. As a result, DTC will no longer mail certificates to investors. 
Participants will still be able to use the Direct Mail by Agent 
(``DMA'') service through which DTC instructs the transfer agent to 
provide DRS statements or physical certificates to investors or their

[[Page 74545]]

appointed third parties. Physical certificates could also be obtained 
through DTC's Central Delivery processes through which DTC mails 
certificates to the participant or allows the participant to pick up 
the certificate.

III. Comment Letters

    The Commission received two comment letters, one from an individual 
investor and the other from DTC.\6\ The individual investor opposed the 
proposed rule change because he contends it is inconsistent with the 
purposes of the Exchange Act and would undermine the ability of 
beneficial shareholders to become registered shareholders, particularly 
with respect to issues that are not DRS eligible. The commenter 
believes that registered shareholders can be assured of receiving 
information directly from the company, receiving dividends promptly, 
and obtaining certain rights afforded under state law.
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    \6\ Supra note 3.
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    To address the concerns raised by the commenter, DTC responded with 
a comment letter. DTC stated that the commenter's understanding of DRS 
is inaccurate because investors holding positions in DRS are actually 
registered directly on the records of the issuer in book-entry form and 
therefore are registered shareholders. Furthermore, DTC contended that 
DRS provides benefits such as reducing the risk of holding securities 
certificates and allowing the assets to be accurately and quickly moved 
from DRS to street name position for despositing, thereby assisting in 
the prompt and accurate clearance and settlement of securities 
transactions. DTC also noted that because investors holding DRS 
positions are registered shareholders, they will receive all 
communications and disbursements directly from the issuer and may 
request a certificate directly from the issuer's transfer agent.

IV. Discussion

    Section 17A(b)(3)(F) of the Act requires, among other things, that 
the rules of a clearing agency be designed to promote the prompt and 
accurate clearance and settlement of securities transactions, assure 
the safeguarding of securities and funds which are in the custody or 
control of the clearing agency or for which it is responsible, to 
foster cooperation and coordination with persons engaged in the 
clearance and settlement of securities transactions, to remove 
impediments to and perfect the mechanism of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions, and, in general, to protect investors and the public 
interest.\7\ Broker-dealers currently use DTC's services to obtain 
securities certificates on behalf of themselves or their customers. 
Discontinuing those services at DTC should decrease the use of 
securities certificates. DTC's rule change should make processing 
securities transactions more safe and efficient by discouraging the use 
of securities certificates, which increase the risks and costs 
associated with processing securities transactions.
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    \7\ 15 U.S.C. 78q(b)(3)(F).
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    Contrary to the commenter's statements that DTC's proposed rule 
change would undermine the investor's ability to become a registered 
shareholder or eliminate the investor's ability to obtain a 
certificate, DTC's proposed rule change does neither. Only the issuer 
can decide whether to make securities eligible for DRS or make 
securities certificates available. DTC's proposed rule will simply 
eliminate the issuance of securities certificates through DTC's WT 
service for issues that are participating in DRS. Furthermore, as DTC 
noted, investor's holding their securities in DRS are registered 
shareholders and thereby eligible to all the same rights and 
obligations as are eligible to investors holding securities 
certificates.
    Accordingly, for the reasons stated above the Commission believes 
that the rule change is consistent with DTC's obligation under Section 
17A of the Act.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2008-08) be and hereby 
is approved.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-28963 Filed 12-5-08; 8:45 am]

BILLING CODE 8011-01-P