[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