Document ID: SEC-2009-0241-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2009-02-20T05:00Z

[Federal Register: February 20, 2009 (Volume 74, Number 33)]
[Notices]               
[Page 7941-7942]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20fe09-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59384; File No. SR-DTC-2008-13]

 
Self-Regulatory Organizations; The Depository Trust Company; 
Order Approving a Proposed Rule Change Relating to Eliminating the SRO 
Requirement as a Condition of DTC-Eligibility for Securities That Are 
Eligible for Resale Under Rule 144A Under the Securities Act of 1933

February 11, 2009.

I. Introduction

    On October 9, 2008, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'').\1\ On December 17, 2008, the Commission published 
notice of the proposed rule change in the Federal Register to solicit 
comments from interested persons.\2\ The Commission received no comment 
letters in response to the proposed rule change. For the reasons 
discussed below, the Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 59088 (Dec. 11, 2008), 
73 FR 76688.
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II. Description

    Prior to this rule change, Rule 144A securities,\3\ other than 
Investment Grade Securities, were eligible for DTC's deposit, book-
entry delivery, and other depository services provided, in part, that 
such securities were included in an ``SRO Rule 144A System'' 
(frequently referred to as the ``SRO Requirement''), such as the NASD's 
PORTAL Market System.\4\
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    \3\ Rule 144A, 17 CFR 230.144A, provides a safe-harbor from the 
registration requirements of the Securities Act for resales to 
qualified institutional buyers (``QIBs'') of certain restricted 
securities that when issued were not of the same class as securities 
listed on a national securities exchange registered under the Act. 
Rule 144A(d)(2), 17 CFR 230.144A(d)(2), requires that the seller and 
any person acting on its behalf take reasonable steps to ensure that 
the purchaser is aware that the seller may rely on the safe-harbor 
provided by Rule 144A.
    \4\ Securities Exchange Release No. 33327 (Dec. 13, 1993), 58 FR 
67878 (Dec. 22, 1993) [File No. SR-DTC-90-06]. ``Investment Grade 
Securities'' are defined in that Commission order as nonconvertible 
debt securities and nonconvertible preferred stock which are in one 
of the top four categories by a nationally recognized statistical 
rating organization.
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    Under this rule change, DTC will eliminate the SRO Requirement 
thereby resulting in a uniform procedure for making all Rule 144A 
Securities DTC-eligible. Issuers and participants will continue to be 
responsible for determining that their deposit of Rule 144A Securities 
at DTC and their transactions in Rule 144A Securities through DTC's 
facilities are in compliance with existing DTC rules and the federal 
securities laws,\5\ such as:
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    \5\ In 1994, in an order clarifying certain language in the Rule 
144A Approval Order, the Commission concurred in the position taken 
by DTC that ``Rule 5 [of DTC's rules] does not require DTC to 
determine whether securities, when deposited at DTC, may be 
transferred lawfully by book-entry in light of the Federal 
securities law.'' Order Approving Proposed Rule Change Relating to a 
Clarification of Rule 5, Securities Exchange Act Release No. 33672, 
56 SEC Docket 315 (Feb. 23, 1994) (``Rule 5 Clarification Order''). 
DTC Rule 5 was amended to delete any implication that DTC was under 
any statutory or contractual obligation to determine whether 
securities deposited with DTC could be legally transferred by book-
entry.
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    (i) Rule 2, Section 8, of DTC's rules: ``In connection with their 
use of the Corporation's [DTC's] services, Participants and Pledgees 
must comply with all applicable laws, including all applicable laws 
relating to securities, taxation and money laundering.''
    (ii) DTC's ``Operational Arrangements (Necessary for an Issue to 
Become and Remain Eligible for DTC Services)'' relating to BEO issues 
being made eligible for DTC services: ``Issuer recognizes that DTC does 
not in any way undertake to, and shall not have any responsibility to, 
monitor or ascertain the compliance of any transactions in the 
Securities with the following, as amended from time to time: (1) Any 
exemptions from registration under the Securities Act of 1933; (2) the 
Investment Company Act of 1940; (3) the Employee Retirement Income 
Security Act of 1974; (4) the Internal Revenue Code of 1986; (5) any 
rules of any self-regulatory organizations (as defined under the 
Securities Exchange Act of 1934); or (6) any other local, state, 
federal, or foreign laws or regulations there under.'' This and other 
representations made by issuers to DTC pursuant to the DTC Operational 
Arrangements are mirrored in the Letter of Representations that DTC 
receives from issuers in connection with their deposits of BEO issues 
with DTC.
    (iii) When a Rule 144A Security is made DTC eligible, the issuer 
will continue to be required to execute a copy of the rider to the 
Letter of Representation in the form it appeared prior to this rule 
change except that the reference to the SRO Requirement will be 
deleted.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder

[[Page 7942]]

applicable to DTC. In particular, the Commission believes the proposal 
is consistent with Section 17A(b)(3)(F) of the Act,\6\ which requires 
that the rules of a registered clearing agency are designed to, among 
other things, remove impediments to the perfection of the mechanism of 
a national system for the prompt and accurate clearance and settlement 
of securities transactions.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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    When DTC established the SRO Requirement as a condition of 
eligibility for Rule 144A Securities, DTC and the Commission envisioned 
that an SRO Rule 144A System would provide comprehensive safeguards to 
facilitate the SRO's ability to monitor compliance with Rule 144A. 
However, the only SRO Rule 144A System that was developed was the 
NASD's PORTAL Market System (``PORTAL''). Additionally, PORTAL neither 
developed as anticipated nor included the safeguards contemplated by 
the DTC requirement.\7\ Thus, the Commission agrees with DTC that the 
SRO Requirement is no longer necessary or practical to achieve the 
purpose for which it was added to DTC's rules. In addition, the 
requirement appears to deter the development of alternative markets for 
Rule 144A Securities that could avail traders in 144A Securities of 
DTC's automated clearance, settlement, and risk management services.\8\ 
Accordingly, DTC's removal of the SRO Requirement should expand the 
number of restricted securities that can become eligible for DTC's 
clearance and settlement services thus helping to perfect the mechanism 
of a national system for the prompt and accurate clearance and 
settlement of securities transactions, which is consistent with Section 
17A(b)(3)(F) of the Act.
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    \7\ Securities Exchange Release No. 56172 (Jul. 31, 2007), 72 FR 
44196 (Aug. 7, 2007) [File No. SR-NASDAQ-2006-65].
    \8\ In a 2007 order approving Nasdaq's reestablishment of its 
PORTAL market, the Commission acknowledged comments suggesting such 
and encouraged DTC to review its SRO Requirement. Supra note 7.
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IV. 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 Section 17A of the Act \9\ and the rules and regulations 
thereunder.
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    \9\ 15 U.S.C. 78q-1.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (File No. SR-DTC-2008-13) be and 
hereby is approved.\11\
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    \10\ 15 U.S.C. 78s(b)(2).
    \11\ 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.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
 [FR Doc. E9-3573 Filed 2-19-09; 8:45 am]

BILLING CODE 8011-01-P