Document ID: SEC-2013-2214-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Depository Trust Co.
Posted Date: 2013-12-24T05:00Z

[Federal Register Volume 78, Number 247 (Tuesday, December 24, 2013)]
[Notices]
[Pages 77755-77761]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30595]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71132; File No. SR-DTC-2013-11]

Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of 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

December 18, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 5, 2013, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change described in Items I, II and III below, which Items have 
been prepared by DTC. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change modifies DTC's Rules & Procedures 
(``Rules'') 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, as more fully described below.

II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, DTC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. DTC has prepared summaries, set forth in sections (A), 
(B),

[[Page 77756]]

and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

Purpose
A. Background: DTC's Role Under Section 17A of the Securities Exchange 
Act of 1934, as amended (captioned ``National System for Clearance and 
Settlement of Securities Transactions'')
    DTC is the nation's central securities depository, registered as a 
clearing agency under Section 17A of the Exchange Act (``Section 
17A'').\3\ DTC performs services and maintains securities accounts for 
its participants, primarily banks and broker dealers 
(``Participants'').\4\ Among the services DTC provides to its 
Participants, a Participant may present a Security (as defined in Rule 
1, Section 1 of the DTC Rules) to be made eligible for DTC's depository 
and book-entry services and, if the Security is accepted by DTC as 
eligible for those services and is deposited with DTC for credit to the 
securities account of a Participant, it becomes an ``Eligible 
Security'' (as defined in Rule 1, Section 1 of the DTC Rules). (The 
determination of eligibility is described more fully in Section 3.B., 
below.) 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.
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    \3\ See Securities Exchange Act Release No. 20221 (Sept. 23, 
1983), 48 FR 45167 (Oct. 3, 1983).
    \4\ See 15 U.S.C. 78c(a)(24).
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    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. Participants in DTC agree to be bound by the Rules 
and Procedures of DTC as a condition of membership.
    To facilitate book-entry transfer and other services that DTC 
provides for its Participants with respect to Deposited Securities (as 
defined in Rule 1, Section 1 of the DTC Rules), 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. 
Eligible Securities of an issue deposited at DTC are maintained in 
``fungible bulk;'' i.e., each Participant to whose DTC account 
securities of that issue have been credited has a pro rata 
(proportionate) 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.\5\
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    \5\ 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'').
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    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 of interests, without the need to transfer physical 
certificates.
    The Commission has recognized that DTC plays a ``critical 
function'' in the national system for securities clearance and 
settlement.\6\ More recently, the federal Financial Stability Oversight 
Council, which was established pursuant to the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, designated DTC as a Systemically 
Important Financial Market Utility (as defined therein).\7\
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    \6\ See Securities Exchange Act Release No. 47978, Order 
Granting Approval of a Proposed Rule Change Concerning Requests for 
Withdrawal of Certificates by Issuers, 68 Fed. Reg. 35037, 35041 
(Jun. 4, 2003).
    \7\ See http://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx.
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B. Eligibility Standards for Securities are Set Forth in DTC Rules and 
Procedures
    In furtherance of Section 17A's requirement that DTC's Rules be 
``designed to promote the prompt and accurate clearance and settlement 
of securities transactions . . . and, in general, to protect investors 
and the public interest,'' DTC's Rules and Procedures provide standards 
for determining eligibility.\8\
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    \8\ See DTC Rule 5, http://www.dtcc.com/legal/rules_proc/dtc_rules.pdf; see also Operational Arrangements (Jan. 2012), Section 
I.A., available at http://www.dtcc.com/downloads/legal/rules_proc/eligibility/operational-arrangements.pdf.
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    DTC Rule 5 authorizes DTC to determine whether to accept a security 
as an Eligible Security and when an Eligible Security will cease to be 
such. DTC Rule 6 provides that DTC ``may limit certain services to 
particular issues of Eligible Securities.''
    DTC's Operational Arrangements, Section I.A.2., addresses specific 
standards for making a security an Eligible Security:
    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 or 
Reg S, are processed through a separate program in which Participants 
acknowledge and agree to comply with the applicable restrictions.
    In determining whether deposited securities satisfy DTC's 
eligibility requirements, Section I.B.2. of DTC's Operational 
Arrangements provides that DTC may require an issuer to provide an 
opinion from outside counsel in order ``to substantiate the legal basis 
for eligibility.'' \9\ Additionally, DTC may require legal opinions, 
inter alia, otherwise ``. . . to protect DTC and its Participants from 
risk.'' \10\ That is, DTC may require the issuer's outside counsel to 
provide a legal opinion in support of the eligibility determination.
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    \9\ Section I.A.1 of the Operational Arrangements further 
specifies 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. 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. ''
    \10\ Id.
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C. DTC's Compliance Monitoring Program and Imposition of Deposit Chills 
and Global Locks
    DTC maintains a robust system for monitoring its compliance with 
governing law including, without limitation, the AML requirements of 
the BSA, and OFAC sanctions.\11\
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    \11\ See 31 U.S.C. 5318 (authorizing Secretary of the Treasury 
to require financial institutions to establish AML procedures); 31 
CFR 1020.210 (AML standards for certain financial institutions); 31 
CFR 500.202 (prohibiting, inter alia, dealing in a security 
registered in the name of a person subject to OFAC sanctions).
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    Where such monitoring raises concerns as to whether securities held 
at DTC have been distributed in violation of federal law including, 
without limitation, the requirements of Section 5

[[Page 77757]]

of the Securities Act,\12\ DTC may impose a Deposit Chill or Global 
Lock.
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    \12\ See 15 U.S.C. 77e (prohibiting sales of unregistered 
securities, subject to 15 U.S.C. 77(d)).
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    There are two principal scenarios under which DTC imposes these 
restrictions, as described in more detail below.
(1) Deposit Chills: Large Volume Deposits
    DTC is mindful that various regulatory agencies have identified 
unusually large volumes of deposits of unregistered shares of low 
priced or thinly-traded securities as a ``red flag'' for possible 
unlawful distribution of securities.
    For instance, in pursuing an enforcement action with respect to 
illegal sales of penny stocks, the Commission has highlighted as 
problematical ``sales that represented a high percentage of trading 
volume or of an issuer's public float.'' \13\
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    \13\ See e.g. Order Making Finding and Imposing Remedial 
Sanctions, In the Matter of Ronald S. Bloomfield, et al., SEC Rel. 
No. 62750 (Aug 20, 2010), available at http://www.sec.gov/litigation/admin/2010/34-62750.pdf (enumerating red flags relating 
to how penny stocks were sold, including (a) repeated delivery in 
and selling to the public of privately obtained shares of penny 
stocks; (b) selling within weeks of receipt; (c) selling while 
promotional activity was occurring; and (d) sales that represented a 
high percentage of trading volume or of an issuer's public float).
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    Similarly, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') has advised broker-dealers to be on alert for ``red flags'' 
of possible illegal distribution of unregistered securities. Although 
DTC is not subject to FINRA oversight, DTC has nonetheless taken 
account of FINRA's ``red flags'' in considering if Deposited Securities 
continue to comply with DTC's eligibility requirements. As stated by 
FINRA:
    Recently, FINRA has investigated and brought several enforcement 
actions concerning unregistered distributions of securities. A common 
theme in these cases was that firms resold large amounts of low-priced 
equity securities in over-the-counter transactions.
    The following are examples of red flags of unlawful unregistered 
distributions . . .;
     A customer of the broker opens a new account and delivers 
physical certificates representing a large block of thinly traded or 
low-priced securities;
     A customer of the broker deposits share certificates that 
are recently issued or represent a large percentage of the float for 
the security;
     The company was a shell company when it issued the shares;
     A customer of the broker with limited or no other assets 
under management at the firm receives an electronic transfer or journal 
transactions of large amounts of low-priced, unlisted securities;
     The issuer has been through several recent name changes, 
business combinations or recapitalizations, or the company's officers 
are also officers of numerous similar companies;
     The issuer's SEC filings are not current, are incomplete, 
or nonexistent.\14\
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    \14\ See Financial Industry Regulatory Authority, Inc., 
Regulatory Notice 09-05, available at http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117716.pdf 
(footnotes omitted); see also Review of Disciplinary Action Taken by 
FINRA, In the Matter of the Application of World Trade Financial 
Corp., et al., Securities Exchange Act Release No. 66114, Jan. 6, 
2012, available at http://sec.gov/litigation/opinions/2012/34-66114.pdf (sustaining FINRA violations and sanctions, where 
customers deposited large blocks of recently issued, little known 
stock into firm accounts and directed registered representative to 
sell shortly thereafter, and registered representative failed to 
inquire whether proposed sales qualified for exemption from 
registration and were part of an unlawful distribution.); Order 
Accepting Settlement, Dept. of Enforcement v. NevWest Securities 
Corp et al., NASD Case No. E0220040112-01 (Mar. 13, 2007), available 
at http://wwv.sec.gov/about/offices/ocie/am12007/nasdnev-nevwest.pdf 
(finding that NevWest failed to adequately implement anti-money 
laundering procedures by failing adequately to perform due 
diligence, file Suspicious Activity Reports, or cease trading in 
multiple accounts owned and controlled by customer, regarding over 
500 transactions involving more than 250 billion shares of sub-penny 
stock.)
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    The federal Financial Crimes Enforcement Network (``FinCen''), 
which is responsible for enforcing the AML provisions of the BSA, has 
similarly recognized that ``substantial deposit, transfer or journal of 
very low-priced and thinly traded securities'' implicates anti-money 
laundering monitoring concerns.\15\
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    \15\ Financial Crimes Enforcement Network, The SAR Activity 
Review: Trends Tips & Issues, Issue 15, pp. 23-25 (BSA Advisory 
Group, May 2009), available at http://fincen.gov/news_room/rp/files/sar_tti_15.pdf, citing Financial Industry Regulatory 
Authority, Inc., Regulatory Notice 09-05, available at http://www.finra.org/Industry/Regulation/Notices/2009/P117713; see also 
Financial Crimes Enforcement Network, The Role of Domestic Shell 
Companies in Financial Crime and Money Laundering (2006), available 
at http://www.fincen.gov/LLCAssessment_FINAL.pdf (``These `pump and 
dump' schemes often involve shell companies with low market 
capitalization whose stock trades at pennies per share on the `pink 
sheets' (www.pinksheets.com), OTC Bulletin Board, or other over-the-
counter trading and information systems. One indicator of this 
scheme is concentrated trading in normally thinly traded stocks.'').
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    When DTC detects large volume deposits of a low-priced or thinly-
traded security, and its monitoring otherwise suggests that an issue 
may not be freely-tradeable, it imposes a Deposit Chill on that issue. 
The Deposit Chill blocks the deposit of further securities of the 
issue, although other services, including book-entry transfer 
movements, continue to be provided with respect to the Eligible 
Securities deposited at DTC before the Deposit Chill.
    Section 2 of proposed Rule 22(A) addresses the procedures by which 
DTC gives affected issuers notice of a Deposit Chill and the procedures 
they may follow to object to the restriction, under the standards 
discussed in Section D(1), below.
    Section 2 also provides that if an issuer fails to respond to a 
notice of a Deposit Chill as required, or if DTC determines that the 
response is insufficient to establish that Deposited Securities satisfy 
DTC's eligibility requirements, a Global Lock will be instituted. Under 
such circumstances, an issuer would be given notice of the impending 
Global Lock and an opportunity to demonstrate that a response to the 
Deposit Chill notice had, in fact, been submitted or that in reviewing 
the response, DTC had made a clerical mistake or oversight.
(2) Global Locks: Enforcement Proceedings
    When DTC becomes aware of a law-enforcement or regulatory 
proceeding alleging violations of federal law or regulations (an 
``Enforcement Proceeding''), particularly those alleging any violation 
of Section 5 of the Securities Act, relating to securities of an issue 
on deposit at DTC, DTC imposes a Global Lock on that issue. A Global 
Lock prevents additional deposits and restricts all book-entry and 
related depository services with respect to the issue.\16\
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    \16\ Globally Locked Eligible Securities continue to be Eligible 
Securities unless and until DTC makes a determination under its 
Rules to terminate eligibility, as to which DTC Rule 22, Right to 
Contest Decisions, would apply; alternatively, those securities may 
be held in custody only at DTC, as provided in the DTC Rules and 
Procedures applicable to custody only, i.e., not for book-entry 
transfer and asset services applicable to Eligible Securities. See 
generally http://www.dtcc.com/products/asset/services/custody.php#overview.
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    Sections 2, 3 and 4 of proposed Rule 22(B) address the procedures 
by which DTC gives affected issuers notice of the Global Lock and the 
procedures they may follow to object to the restriction, under the 
standards discussed in Section D(2), below.
D. Grounds for Releasing Deposit Chills and Global Locks
    The fair procedures set forth in proposed Rules 22(A) and (B) are 
designed to enable issuers to object to a Deposit Chill or Global Lock 
prior to imposition of the restriction by DTC or

[[Page 77758]]

to cause DTC to release Deposit Chills and Global Locks imposed without 
such prior notice or at any time during the continuance of any such 
restriction, pursuant to the standards set forth below.
(1) Release of Deposit Chills
    In order to challenge a Deposit Chill, proposed Rule 22(A) provides 
the affected issuer with the opportunity to establish that the issue 
meets DTC's eligibility requirements, including by submitting an 
opinion from independent legal counsel establishing that the securities 
deposited at DTC are freely tradeable. DTC's reliance on legal opinions 
for this purpose is authorized by DTC's Operational Arrangements, which 
expressly authorize DTC to require opinions ``to substantiate the legal 
basis for eligibility,'' or otherwise ``. . . to protect DTC and its 
Participants from risk.'' \17\ If the issuer successfully demonstrates 
that the deposited securities continue to satisfy DTC's eligibility 
requirements, DTC would not impose the Deposit Chill or, if already in 
effect, would release it.
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    \17\ See, supra, n.11; see also DTC Rule 5 (providing that DTC 
``shall accept a Security as an Eligible Security only . . . upon 
such inquiry, or based upon such criteria, as the Corporation may, 
in its sole discretion, determine from time to time.'').
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(2) Release of Global Locks
    In order to challenge a Global Lock, proposed Rule 22(B)(2)(b) 
provides the affected issuer with the opportunity to establish that (i) 
DTC has made a mistake in associating the issuer's Eligible Securities 
with the specified Enforcement Proceeding or (ii) that the Enforcement 
Proceeding has been has been withdrawn or dismissed on the merits with 
prejudice or otherwise resolved in a final, non-appealable judgment in 
favor of the defendants allegedly responsible for the alleged 
violations of Section 5 of the Securities Act relating to the Eligible 
Securities. If the issuer successfully demonstrates either factor, DTC 
would not impose the Global Lock or, if already in effect, DTC would 
release it.
    Otherwise, proposed Rule 22(B)(3) provides that DTC will release a 
Global Lock within either one year or six months, as the case may 
be,\18\ after the final disposition of the Enforcement Proceeding with 
respect to those defendants alleged to have been responsible for the 
illegal distribution of the Eligible Securities that were subject to 
the Global Lock. Similarly, pursuant to proposed Rule 22(B)(4), where a 
Global Lock has been imposed because an issuer has failed to satisfy 
DTC's concerns that led to a Deposit Chill,\19\ the one year/six month 
waiting period also applies, but runs from the date of the imposition 
of the Global Lock.
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    \18\ Six months applies to issuers that are required to file, 
and have filed, all reports pursuant to Sections 13(a) or 15(d) of 
the Exchange Act, and one year applies to issuers that are not 
publicly reporting.
    \19\ See proposed Rule 22(A)(2)(c); see also Section 3.F.1. 
infra.
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    The proposed standard to release a Global Lock after the passage of 
six months or one year (from the appropriate starting date) was 
developed by analogy to the safe harbor provision of the Securities 
Act, Rule 144, which, under certain circumstances, permits the 
unregistered resale of restricted securities (as defined under 
paragraph (a)(3) of the Rule) after expiration of the relevant holding 
period. However, again by reference to Rule 144, this approach is not 
applicable to an issuer that is, or was, a shell company as defined in 
Rule 144(i)(1), unless the issuer has filed the specified disclosure 
required by Rule 144(i)(2).
E. Legal Principles Underlying Fair Procedures Challenging Deposit 
Chills and Global Locks
(1) Section 17A(b)(3) and (5)
    Under Section 17A, where a registered clearing agency denies or 
limits access to the agency's services to a ``person,'' it must employ 
``fair procedures.'' \20\ Such procedures require the clearing agency 
to give the person notice and an opportunity to address the specific 
grounds for denial or prohibition or limitation and to keep a 
record.\21\
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    \20\ See Exchange Act, Section 17A(b)(3)(H); 15 U.S.C. 78q-
1(b)(3)(H).
    \21\ See Exchange Act, Section 17A(b)(5)(B); 15 U.S.C. 78q-
1(b)(5)(B).
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    In its decision in IPWG, the Commission ruled, inter alia, that 
issuers are ``persons'' for the purposes of Section 17(a)(b)(3).
(i) Fair Procedures in Advance of the Imposition of a Deposit Chill or 
Global Lock
    Section 17A does not specify the nature of the fair procedures DTC 
must provide to ``persons,'' including issuers. In IPWG, the Commission 
observed that:

    ``Exchange Act Section 17A(b)(5)(B) states that, when a 
registered clearing agency determines that ``a person shall be . . . 
prohibited or limited with respect to access to services offered by 
the clearing agency, the clearing agency shall notify such person 
of, and give him an opportunity to be heard upon, the specific 
grounds for . . . prohibition or limitation under consideration and 
keep a record.'' \22\

    \22\ IPWG at http://www.sec.gov/litigation/opinions/2012/34-66611.pdf.
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    The Commission further ruled in IPWG that DTC ``should adopt 
procedures that accord with the fairness requirements of Section 
17A(b)(3)(H), which may be applied uniformly'' in the cases where DTC 
denies or limits services with respect to an issuer's securities. 
Consistent with the Commission's broad directive, and as set forth 
below in Sections 3F(1) and (2), proposed Rules 22(A) and 22(B) 
encompass uniform fair procedures for issuers whose securities may be 
or are subject to a Deposit Chill or Global Lock. These procedures 
include:
     Advance notice (except as provided in the following 
section) that a Deposit Chill or Global Lock will be imposed;
     An explanation of the specific grounds upon which the 
restrictions are being or have been imposed;
     The actions that the issuer must take in order to prevent 
or remove the restriction;
     The process DTC will undertake to review written 
submissions of the issuer and to render a final decision concerning the 
restriction; and
     Maintaining a complete record for submission to the 
Commission in the event an issuer appeals.
(ii) Fair Procedures Where a Deposit Chill or Global Lock Is Imposed 
Without Advance Notice
    In IPWG, the Commission opined that, when faced with justifiable 
circumstances, DTC may design fair procedures ``in accordance with its 
own internal needs and circumstances,'' \23\ recognizing that:
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    \23\ Id. at 12, fn. 36.
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    If DTC believes that circumstances exist that justify imposing a 
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, it may do so. However, in 
such circumstances, these processes should balance the identifiable 
need for emergency action with the issuer's right to fair procedures 
under the Exchange Act. Under such procedures, DTC would be authorized 
to act to avert an imminent harm, but it could not maintain such a 
suspension indefinitely without providing expedited fair process to the 
affected issuer.\24\
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    \24\ Id. at 12-13 (footnote omitted); see also ATIG at 3, fn. 5 
(affirming that DTC may, consistent with IPWG, impose a Deposit 
Chill or Global Lock without advance notice in order to avert an 
imminent harm).
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    For example, where DTC's monitoring suggests that marketplace 
actors are

[[Page 77759]]

continuing to cause the deposit of Eligible Securities that are not 
freely-tradeable, DTC would need to act quickly to stop further 
improper deposits, and thus may impose a restriction without prior 
notice. Otherwise, if DTC were to provide prior notice, marketplace 
actors would have additional time to make such deposits and accelerate 
the deposit volume during the notice period. In these cases, the risk 
of harm to the national clearance and settlement system stemming from 
comingling or further comingling of non-freely tradeable securities 
with DTC's fungible bulk for that issue outweighs any potential impact 
on the issuer as a result of not giving it advance notice of the 
restriction.
    As described below in Sections 3.F(1) and (2), where a restriction 
is imposed before notice in order to forestall, among other things, 
imminent harm, injury or other such consequence, DTC will provide 
notice to the affected issuer within three business days from the 
imposition of the restriction. After DTC has provided such notice, the 
affected issuer is afforded the same fair procedures as issuers that 
received advance of a restriction.
F. Fair Procedures: Summary of Proposed Rule Changes
    DTC proposes to: (i) Adopt a new Rule 22(A) that provides specific 
fair procedures for issuers in connection with imposition and release 
of Deposit Chills; and (ii) adopt a new Rule 22(B) that provides 
specific fair procedures for issuers in connection with imposition and 
release of Global Locks. DTC additionally proposes to amend Rule 1, 
Section 1 in the definition of ``Procedures'' to include, expressly, 
the Operational Arrangements.\25\
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    \25\ DTC's existing Rule 22 is primarily focused on procedures 
applicable to DTC's Participants that are facing disciplinary 
actions as a result of violating DTC's Rules. Rule 22, however, also 
sets forth the fair procedures available to issuers where DTC 
determines that an issuer's Eligible Securities should no longer be 
deemed to be such or, as provided by Rule 5, where DTC determines 
not to approve a security as an Eligible Security. Rule 22 does not 
address the fair procedures applicable to issuers stemming from 
Deposit Chills or Global Locks. DTC has determined to set forth such 
procedures in the two proposed rules.
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    The substantive elements of the proposed rules are as follows:
(1) Proposed Rule 22(A)
    Section 1 provides that Rule 22(A) sets forth the fair procedures 
available to issuers where DTC intends to impose or has imposed a 
Deposit Chill as a result of DTC having detected large volume deposits 
with respect to the issuer's Eligible Securities.
    Section 2 provides that issuers will be given twenty business days' 
advance notice that DTC intends to impose a Deposit Chill or, if DTC 
reasonably determines that it is faced with, among other things, 
imminent harm, injury or other such consequence, to DTC or its 
Participants, or where the Corporation otherwise reasonably determines 
that such action is necessary to protect the prompt and accurate 
clearance and settlement of securities transactions through the 
Corporation, whether or not such circumstances are otherwise specified 
by Rule 22(A), notice will be given within three business days after 
the Deposit Chill has been imposed. In addition to setting forth the 
contents of the notice, Section 2(a) sets forth the issuer's right to 
contest the action by submitting a response to the notice and the time 
frame for doing so.
    Section 2(b) requires, consistent with DTC's Operational 
Arrangements, that the issuer support the response with a legal 
opinion, prepared by independent counsel, confirming that the issuer's 
securities deposited at DTC satisfy DTC's eligibility requirements. As 
guidance for the issuer and its counsel, DTC will provide a template 
legal opinion. DTC will accept, from counsel to the issuer reasonably 
acceptable to DTC,\26\ an opinion that includes the material opinions 
and other matters set forth in the template.
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    \26\ In determining whether counsel is acceptable for this 
purpose DTC refers to the relevant provisions set forth in the 
Operational Arrangements. See, supra, n.12.
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    Section 2(b)(i) provides that, in response to the Deposit Chill 
Response, DTC may present the issuer with a request for additional 
information (the ``Additional Request''), to which the issuer shall 
submit a response to the Corporation (the ``Additional Response'') in a 
time frame set by the Corporation, which shall not be less than 10 
business days from the date of the Additional Request.
    Section 2(c) establishes the time frame in which DTC will provide 
the issuer with a written decision in connection with the issuer's 
timely response to notice of the Deposit Chill. Specifically, DTC will 
provide each issuer that submits a Deposit Chill Response or Additional 
Response with a written decision within twenty business days after DTC 
receives the Deposit Chill Response or the Additional Response or, in 
the case of a Deposit Chill imposed before issuance of the Deposit 
Chill Notice, within ten business days after receipt by DTC of the 
Deposit Chill Response or Additional Response.
    Section 2(c) also provides that if the issuer does not submit a 
response to the notice or does not do so in a timely matter, or if DTC 
reasonably determines that the response does not establish that the 
issuer's securities on deposit at DTC satisfy DTC's eligibility 
requirements, DTC will impose a Global Lock on the issue. An officer of 
DTC who did not play any role in the determination regarding the 
Deposit Chill notice will review the issuer's response and decide 
whether the response has satisfied DTC's eligibility standards. Once 
the officer has made a decision: (i) If the decision is in favor of the 
issuer, DTC will not impose or will release the Global Lock, as the 
case may be; or (ii) if the decision is that the issuer's response is 
not satisfactory, DTC will nevertheless not impose the Global Lock 
until DTC has given the issuer notice of the adverse decision and the 
opportunity to demonstrate that DTC's determination was the result of 
DTC's clerical mistake or a mistake arising from an oversight or 
omission in reviewing the issuer's response. This added process will 
not constitute a substantive review. It will be limited to DTC making a 
determination whether, as the issuer has asserted, there was a clerical 
mistake or mistake arising from an oversight or omission. Absent such a 
showing, the Global Lock will be imposed.
    Section 2(d) specifies the contents of the ``record'' in the event 
that the issuer appeals to the Commission from an adverse decision.
    Section 3(a) provides that the issuer's right to respond to the 
notice is dependent on compliance with the time periods specified for 
making submissions.
    Section 3(b)(i) reserves to DTC the right: (x) To lift a Deposit 
Chill, or (y) to impose a Deposit Chill after it has provided a Deposit 
Chill Notice but before it has received or resolved a Deposit Chill 
Response (including after any Additional Request when an Additional 
Response is pending) without waiting for the applicable notice periods 
to run, in either case, in order to prevent imminent harm, injury or 
other such consequences to DTC or its Participants or where DTC 
reasonably determines that such action is necessary to protect the 
prompt and accurate clearance and settlement of securities transactions 
through it, irrespective of whether Rule 22(A) provides specific 
grounds for doing so. Section 3(b)(ii) specifically provides that Rule 
22(A) does not apply to processing interruptions based upon ordinary 
course operational requirements such as those in

[[Page 77760]]

connection with corporate actions and reorganization events that may 
occur at the request of the issuer or its representatives, or other 
such processing interruptions specifically set forth in the Procedures.
    Section 3(b)(iii) recognizes that Rule 22(A) shall not displace any 
legal or regulatory requirements that DTC is subject to under 
applicable law, rule or regulation. This could conceivably include 
imposing a Deposit Chill where required by applicable law, rule or 
regulation and for reasons that may not include large volume deposits 
of low value or thinly traded securities. If, however, DTC imposed a 
Deposit Chill under such circumstances, DTC would afford the affected 
issuer the fair procedures set forth in proposed Rule 22(A) (except if 
prohibited by law, rule or regulation). Section 3(b)(iv) emphasizes 
that while DTC may freely communicate with the issuer or its 
representative, substantive communications must be in writing in order 
to provide the Commission with a complete record in the event of an 
appeal.
    Section 3(c) provides that in the event that the Corporation shall 
impose a Deposit Chill pursuant to Section 3(b)(i) of Rule 22(A), the 
procedures contained in Section 2(c) of Rule 22(A) shall apply, 
including that the Corporation shall provide the Deposit Chill Response 
within ten (10) business days after the Corporation receives the 
Deposit Chill Response or the Additional Response.
    Section 3(d) sets forth the means by which DTC shall send notice to 
the issuer.
(2) Proposed Rule 22(B)
    Section 1 provides that Rule 22(B) sets forth the fair procedures 
available to issuers where DTC imposes a Global Lock with respect to an 
issuer's Eligible Securities, in two situations. Section 1(a) refers to 
a Global Lock based upon an Enforcement Proceeding with respect to an 
issue of securities that DTC determines were deposited at DTC. Section 
1(b) refers to a Global Lock where an issuer has failed to satisfy the 
requirements to object to the imposition of, or for lifting, a Deposit 
Chill pursuant to Rule 22(A).
    Section 2(a) provides that issuers will be given twenty business 
days' advance notice that DTC intends to impose a Global Lock or if DTC 
reasonably determines that it is faced with, among other things, 
imminent harm, injury or other such consequence to itself or its 
Participants, or where the Corporation otherwise reasonably determines 
that such action is necessary to protect the prompt and accurate 
clearance and settlement of securities transactions through the 
Corporation, whether or not such circumstances are otherwise specified 
by Rule 22(B), notice will be given within three business days after 
the Global Lock has been imposed. In addition to setting forth the 
contents of the notice, Section 2(a) sets forth the issuer's right to 
contest the action by submitting a response to the notice and the time 
frame for doing so.
    Pursuant to Section 2(b)(i), if the issuer is able to demonstrate 
that an error had been made in identifying its securities as the 
subject of the underlying Enforcement Proceeding, the Global Lock would 
not be imposed or, had it already been imposed (whether by virtue of 
being imposed without notice or at any time after the imposition of a 
Global Lock), it would be released. Pursuant to Section 2(b)(ii), if, 
at any time, the Enforcement Proceeding has been withdrawn or dismissed 
on the merits with prejudice or otherwise resolved in a final, non-
appealable judgment in favor of the Defendants allegedly responsible 
for the violations of Section 5 of the Securities Act relating to the 
Eligible Securities, the Global Lock would not be imposed or, had if it 
had already been imposed, it would be released. In reviewing the 
issuer's response, DTC will not provide a forum for litigating or re-
litigating the allegations or findings in the Enforcement Proceeding, 
provided, however, that the issuer's response may include a 
demonstration that the allegations or findings in the Enforcement 
Proceeding have been rejected by a court or that the issuer can 
otherwise satisfy the criteria set forth in Section 3 of proposed Rule 
22(B).
    Section 2(c) sets forth the time frame in which DTC will provide 
the issuer with a written decision responsive to the Global Lock 
Response. Specifically, DTC will provide each issuer that submits a 
Global Lock Response with a written decision within twenty business 
days after DTC receives Global Lock Response or, in the case of a 
Global Lock imposed before issuance of the Global Lock Notice, within 
ten business days of its imposition.
    Section 2(d) specifies the contents of the ``record'' in the event 
that the issuer appeals to the Commission from a determination by DTC.
    Section 3 provides for the release of Global Locks. In the case of 
Global Locks imposed pursuant to Section 1(a), the restriction will be 
lifted either six months or one year, as the case may be, after the 
Enforcement Proceeding has been withdrawn or dismissed on the merits 
with prejudice or otherwise resolved in a final, non-appealable 
judgment in favor of the Defendants allegedly responsible for the 
violations of Section 5 of the Securities Act relating to the Eligible 
Securities. The six-month period applies to affected issuers that file 
periodic reports pursuant to Section 13(a) and 15(d) of the Exchange 
Act) and the one-year period applies to issuers that are not public 
reporting companies. In support of the foregoing: (i) The Issuer may be 
required to submit a legal opinion, in form and substance satisfactory 
to the Corporation, from independent securities counsel to the issuer, 
reasonably acceptable to the Corporation, and/or (ii) such other 
evidence or other documentation as the Corporation may reasonably 
require. Companies defined in Securities Act Rule 144(i)(1) are not 
entitled to take advantage of this procedure and the Global Lock will 
remain in effect for any shell company issuer, unless it complies, or 
has complied, with the requirements of Securities Act Rule 144(i)(2).
    Section 4 is similar to Section 3, except that the one-year and 
six-month time frames are measured from the date of the imposition of 
the Global Lock pursuant to Section 1(b).
    Section 5(a) provides that the issuer's right to respond to the 
notice is dependent on compliance with the time periods for making 
submissions.
    Section 5(b)(i) reserves to DTC the right: (x) To lift a Global 
Lock, or (y) to impose a Global Lock after DTC has provided a Global 
Lock Notice but before it has received or resolved a Global Lock 
Response without waiting for the applicable notice periods to run, in 
either case, in order to prevent imminent harm, injury or other such 
consequences to DTC or its Participants or where DTC reasonably 
determines that such action is necessary to protect the prompt and 
accurate clearance and settlement of securities transactions through 
it, irrespective of whether Rule 22(B) provides specific grounds for 
doing so. Section 5(b)(ii) specifically provides that Rule 22(B) does 
not apply to processing interruptions based upon ordinary course 
operational requirements such as those in connection with corporate 
actions and reorganization events that may occur at the request of the 
issuer or its representatives, or other such processing interruptions 
set forth in the Procedures.
    Section 5(b)(iii) recognizes that Rule 22(B) shall not displace any 
legal or regulatory requirements that DTC is subject to under 
applicable law, rule or regulation. This could conceivably

[[Page 77761]]

include imposing a Global Lock where required by applicable law, rule 
or regulation and for reasons that may not include an Enforcement 
Proceeding. If, however, DTC imposed a Global Lock under such 
circumstances, DTC would afford the affected issuer the fair procedures 
set forth in proposed Rule 22(B) (except if prohibited by law, rule or 
regulation). Section 5(b)(iv) provides that while DTC may freely 
communicate with the issuer or its representative, substantive 
communications must be in writing in order to provide the Commission 
with a complete record in the event of an appeal.
    Section 5(c) sets forth the means by which DTC shall send notice to 
the issuer.
Statutory Basis
    The proposed Rules 22(A) and (B) establish a procedure which 
provides for: (a) criteria for notice to an issuer that a Deposit Chill 
or Global Lock will be imposed, (b) an explanation of the specific 
grounds upon which the restrictions are being or have been imposed, (c) 
the actions that the issuer must take in order to prevent or remove the 
restriction, (d) the process DTC will undertake to review written 
submissions of the issuer and to render a final decision concerning the 
restriction, and (e) maintenance of a complete record for submission to 
the Commission in the event an issuer appeals. As such the proposed 
rule change is in accordance with Section 17A(b)(5)(B) of the Act \27\ 
and encompasses a uniform procedure for issuers whose securities may be 
or are subject to a Deposit Chill or Global Lock. Therefore, the 
proposed rule change is consistent with the requirements of the Section 
17A(b)(3)(H) of the Act,\28\ which requires that the rules of a 
registered clearing agency are in accordance with the provisions of 
Section 17A(b)(5)(B) of the Act, and in general provide a fair 
procedure with respect to the prohibition or limitation by the clearing 
agency of any person with respect to access to services offered by the 
clearing agency.
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    \27\ See 15 U.S.C. 78q-1(b)(5)(B) which provides: ``In any 
proceeding by a registered clearing agency to determine whether a 
person shall be denied participation or prohibited or limited with 
respect to access to services offered by the clearing agency, the 
clearing agency shall notify such person of, and give him an 
opportunity to be heard upon, the specific grounds for denial or 
prohibition or limitation under consideration and keep a record. A 
determination by the clearing agency to deny participation or 
prohibit or limit a person with respect to access to services 
offered by the clearing agency shall be supported by a statement 
setting forth the specific grounds on which the denial or 
prohibition or limitation is based.
    \28\ 15 U.S.C. 78q-1(b)(3)(H).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule changes will have any 
impact on, or impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act, because 
the proposed procedures as described above will apply to all issues 
that may subject to Deposit Chill or Global Lock.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments relating to the proposed rule change have not yet 
been solicited or received with respect to this filing. To the extent 
DTC receives written comments on the proposed Rule change DTC will 
forward such comments to the Commission.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

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 Elizabeth M. Murphy, 
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 January 14, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
Kevin M. O'Neill,
Deputy Secretary.
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    \29\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-30595 Filed 12-23-13; 8:45 am]
BILLING CODE 8011-01-P