[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] ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \9\15 U.S.C. 78q-1 (1988). \10\15 U.S.C. 78q-1(b)(3) (A) and (F) (1988). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \12\17 CFR 200.30-3(a)(12) (1993). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 94-18135 Filed 7-25-94; 8:45 am] BILLING CODE 8010-01-M