[Federal Register Volume 59, Number 142 (Tuesday, July 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18135]
[[Page Unknown]]
[Federal Register: July 26, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34404; File No. SR-PHILADEP-90-03]
Self-Regulatory Organizations; The Philadelphia Depository Trust
Company; Order Approving a Proposed Rule Change Relating to
Implementation of an Automated Balance Certificate Program on a
Temporary Basis
July 19, 1994.
On September 28, 1990, the Philadelphia Depository Trust Company
(``PHILADEP'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change (File No. SR-PHILADEP-90-03)
under Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ to establish an automated program for the transfer between
PHILADEP and its transfer agents of certain securities maintained and
controlled by PHILADEP. Notice of the proposal was published in the
Federal Register on November 14, 1990.\2\ On May 24, 1991, PHILADEP
amended the proposal to change the name of the program from A Prompt
Transfer Service to Fully Automated Securities Transfer Reconciliation
Accounting Control System (``FASTRACS'').\3\ No comment letters were
received. For the reasons discussed below, the Commission is approving
the proposed rule change on a temporary basis through December 30,
1994. The program will be limited to three transfer agents for the
duration of the temporary approval period.
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\1\15 U.S.C. 78(b)(1) (1988).
\2\Securities Exchange Act Release No. 28598 (November 7, 1990),
55 FR 47595.
\3\Letters from Sharon Metzker Richmond, Law Clerk, PHILADEP, to
Jonathan Kallman, Assistant Director, Division of Market Regulation,
Commission (May 24, 1991).
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I. Description
PHILADEP is establishing an automated program for the transfer of
certain securities between PHILADEP and its transfer agents. Under
PHILADEP's program, PHILADEP and the transfer agents participating in
the program will use a master balance certificate\4\ to evidence the
number of securities of a particular issue transferred into or out of
PHILADEP and through the transfer agents. The transfer agents will have
custody of the securities in the form of balance certificates
registered in PHILADEP's nominee name. The balance certificates will be
adjusted daily to reflect PHILADEP's withdrawal and deposit activity.
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\4\For the purpose of FASTRACS, ``balance certificate'' shall
mean a certificate registered in the name Philadep & Co. which
evidences (i) record ownership by Philadep & Co. of the number of
shares or units of the issue shown from time to time on the records
of the issuer thereof or (ii) the duties of the issuer thereof to
perform the obligations shown from time to time on the records of
the issuer thereof, which records are maintained by Transfer Agent,
as being evidenced by such certificate, which certificate shall be
retained by Transfer Agent. Balance Certificate Agreement, Dec. 3,
1992, Bank of N.Y.-Philadelphia Depository Trust Co., Section 1(a).
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Previously, if a participant requested the withdrawal of one
hundred shares of a security from PHILADEP, PHILADEP would send an
electronic or written instruction to the transfer agent followed by a
physical transfer of the shares from PHILADEP to the transfer agent.
The transfer agent would reissue the shares in the requested name and
would send the shares back to PHILADEP. Using the FASTRACS program, an
electronic instruction will immediately effectuate the withdrawal
transfer, eliminating the extra step of physically transferring the
security from PHILADEP to the transfer agent.
For issues eligible for FASTRACS, PHILADEP will deliver to
participating transfer agents nominee and/or non-nominee
certificates\5\ for each issue. The transfer agent will cancel the
certificates delivered and issue one or more balance certificates per
issue. The transfer agent will retain possession of the balance
certificates, holding them in a secured area at all times, and PHILADEP
will be provided a sample balance certificate for each issue.
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\5\For the purpose of FASTRACS, the term ``nominee
certificates'' shall mean a security of an issue registered in the
name of Philadep & Co. The term ``non-nominee certificate'' means a
security of an issue registered in a name other than Philadep & Co.
Balance Certificate Agreement, Nov. 24-Dec. 3, 1992, Bank of N.Y.-
Philadelphia Depository Trust Co., Sections 1(II) (g) and (h).
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PHILADEP will deliver to participating transfer agents nominee
certificates and/or non-nominee certificates with the instructions to
register the transfer of the non-nominee certificates into the name of
Philadep & Co. PHILADEP also will instruct the transfer agent to
include the securities evidenced by the non-nominee and/or nominee
certificates in the balance certificate for the issue represented by
such balance certificate. PHILADEP also may issue instructions to the
transfer agent to register the transfer of securities evidenced by a
balance certificate to a name other than Philadep & Co. or to issue a
certificate to a name other than Philadep & Co.
After issuing a balance certificate, the transfer agent will
increase or decrease the number of securities evidenced by the balance
certificate so that at the end of each day it will evidence the number
of securities equal to the previous balance plus any securities
received from PHILADEP to be registered in the name of Philadep & Co.
less any transfers and issuance of certificates in a name other than
Philadep & Co. The transfer agent will confirm in writing, on a daily
basis or other periodic basis as PHILADEP may reasonably request, the
number of securities evidenced by each balance certificate.
The obligations of the FASTRACS transfer agents and PHILADEP will
be set forth in a Balance Certificate Agreement (``Agreement'')
executed by each FASTRACS transfer agent and PHILADEP.\6\ The Agreement
provides that all shares or units or the amount of any obligations
evidenced by the balance certificate which come into possession of the
transfer agent pusuant to FASTRACS will be the sole property of
PHILADEP. The transfer agent will not obtain any legal or equitable
right, title, or interest in or to such securities evidenced by the
balance certificates.
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\6\If a transfer agent employs a processor to perform the
transfer agent's duties in FASTRACS, the transfer agent and
processor must enter into a separate agreement obligating the
processor to perform the duties described in the Balance Certificate
Agreement. The transfer agent must notify PHILADEP if there is any
material change to the terms of the agreement between the transfer
agent and processor, if there is a termination or anticipated
termination of the agreement, or if there is a breach of the
agreement or an event that will affect or might reasonably be
expected to affect the processor's ability to perform any of its
obligations under the agreement. PHILADEP will only permit a
transfer agent to employ a processor as its agent if the transfer
agent represents and warrants that it will bear any and all
liability and responsibility for all securities held by, all actions
taken by, and all obligations assigned to the processor with the
same force and effect as if the securities were held by, or the
actions taken by, or the obligations were of the transfer agent.
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The Agreement also provides that upon request from PHILADEP, the
transfer agent will be obligated to deliver, within twenty-four hours,
all securities evidenced by a balance certificate. If the transfer
agent determines that any security held by it is lost, destroyed,
stolen, or otherwise unaccounted for, the transfer agent must notify
PHILADEP immediately and issue a replacement certificate.
The Agreement provides that the transfer agent must maintain an
insurance policy in the form of a customary bankers blanket bond to
cover any securities received from PHILADEP or held by the transfer
agent pursuant to FASTRACS. The bond must be in the maximum amount of
one hundred million dollars. The Agreement further states that the
transfer agent must provide annually to PHILADEP's satisfaction
evidence that such blanket bond or comparable plan of insurance is in
full effect.\7\ When the transfer agent is responsible for the shipment
of securities, the Agreement requires that the transfer agent provide
adequate insurance coverage or require coverage from the carrier to
cover losses that occur while in transit to and until received by
PHILADEP. The amount of coverage must be equal to or exceed 110% of the
fair market value of the securities shipped. The transfer agent is not
obligated to deliver shares evidenced by balance certificates within
twenty-four hours of such a request from PHILADEP if the aggregate
value of the shares to be delivered exceeds the amount of the bankers
blanket bond. The transfer agent will instead deliver or make available
the certificates as promptly as possible.\8\
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\7\The transfer agent may limit, decrease, or cancel the blanket
bond protection upon thirty days prior notice of such action to
PHILADEP.
\8\Before delivering to PHILADEP certificates with an aggregate
current market value in excess of the maximum amount of the blanket
bond, the transfer agent may not create or maintain certificates,
other than any balance certificate, having a value in excess of the
blanket bond.
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Instructions from PHILADEP to register the transfer of securities
evidenced by a balance certificate in a name other than PHILADEP will
constitute a presentation of the balance certificate to the transfer
agent under applicable law. The same warranties that would apply if
PHILADEP physically presented the balance certificate to the transfer
agent will be applicable in this balance.
II. Discussion
The Commission believes that PHILADEP's proposal is consistent with
Section 17A of the Act\9\ and specifically with Section 17A(b)(3) (A)
and (F).\10\ Sections 17A(b)(3) (A) and (F) require that a clearing
agency be organized and its rules be designed to facilitate and promote
the prompt and accurate clearance and settlement of securities
transactions and to assure the safeguarding of securities and funds in
its custody or control or for which it is responsible.
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\9\15 U.S.C. 78q-1 (1988).
\10\15 U.S.C. 78q-1(b)(3) (A) and (F) (1988).
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Under PHILADEP's proposed rule change an electronic instruction
will replace the physical transfer of securities between PHILADEP and
the transfer agent. The proposal should help alleviate the
inefficiencies associated with the physical transfer of securities and
should help reduce the possibility of loss while securities are in
transit between PHILADEP and the transfer agent. The transfer of
securities will be faster and more efficient with the likely effect of
reducing costs related to the preparation of written instructions and
delivery of the securities. PHILADEP's proposed rule change also will
help PHILADEP fulfill its safekeeping obligations by allowing PHILADEP
to maintain securities in a form which should reduce the chances of
loss and theft.
PHILADEP's proposed rule change requires that the transfer agent be
insured by a customary bankers blanket bond which will cover any
securities received from PHILADEP and/or held by the transfer agent or
processor on behalf of PHILADEP under the Agreement. Where balance
certificates have an aggregate current market value in excess of the
maximum value of the bankers blanket bond, the transfer agent will not
create or maintain certificates in excess of that value, other than any
balance certificate, prior to delivery to PHILADEP. These insurance
requirements will better enable PHILADEP to safeguard securities which
are at the transfer agent or are in transit from the transfer agent to
PHILADEP and should aid in the safekeeping of securities with a market
value in excess of the bankers blanket bond.
PHILADEP's proposed rule change will improve and facilitate a safer
and more effective mechanism for the transfer of securities between
PHILADEP and its transfer agents and is therefore consistent with the
requirements of section 17A of the Act. For the reasons stated above,
the Commission is approving PHILADEP's proposed rule change on a pilot
basis through December 30, 1994. The temporary approval will provide
PHILADEP the opportunity to continue testing the FASTRACS program in
order to collect data for the Commission to review.\11\
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\11\Currently, PHILADEP is conducting tests with one transfer
agent and expects to add and complete testing with two additional
transfer agents by the end of 1994. Upon successful completion of
the tests with the three transfer agents, PHILADEP will file a
proposed rule change under section 19(b)(2) of the Act to seek
permanent approval of the FASTRACS program.
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III. Conclusion
The Commission finds that PHILADEP's proposal is consistent with
the requirements of the Act and particularly with section 17A 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-PHILADEP-90-03) be, and
hereby is, approved through December 30, 1994.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18135 Filed 7-25-94; 8:45 am]
BILLING CODE 8010-01-M