[Federal Register Volume 59, Number 235 (Thursday, December 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30124]


[[Page Unknown]]

[Federal Register: December 8, 1994]


_______________________________________________________________________

Part V





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Parts 200 and 240




Transfer Agents Operating Direct Registration System, Assumption or 
Termination of Transfer Agents Services and Transfer Agents Rules; Rule 
and Proposed Rules
SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-35038; File No. S7-34-94]

 
Transfer Agents Operating Direct Registration System

AGENCY: Securities and Exchange Commission.

ACTION: Concept release.

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SUMMARY: The Securities and Exchange Commission is soliciting comment 
on the policy implications of, and the regulatory issues raised by, a 
transfer agent operated book-entry registration system (hereinafter 
referred to as the ``direct registration system'' or ``DRS''). 
Investors who choose to participate in a direct registration system 
could have their securities registered in book-entry form directly on 
the books of the issuer and could receive a statement of ownership in 
lieu of a securities certificate. The direct registration system would 
extend book-entry registration to corporate equity and debt 
securityholders; book-entry registration is currently offered to 
dividend reinvestment plans and shares of registered investment 
companies. This system is being considered by issuers and transfer 
agents in preparation for faster trade settlements which will be 
required on June 7, 1995.

DATES: Comments should be submitted on or before February 6, 1995.

ADDRESSES: Interested persons should submit three copies of their 
written data, views, and opinions to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Mail Stop 6-
9, Washington DC 20549. Comment letters should refer to File No. S7-34-
94. All comment letters will be available for public inspection and 
copying at the Commission's Public Reference Room, 450 Fifth St., NW., 
Washington DC 20549.

FOR FURTHER INFORMATION CONTACT:
Ester Saverson, Jr., Senior Counsel, or Michele J. Bianco, Attorney, at 
202/942-4187, Office of Market Supervision, Mail Stop 5-1, Division of 
Market Regulation, Securities and Exchange Commission, Washington, DC 
20549.

SUPPLEMENTARY INFORMATION: In October 1993, the Commission adopted Rule 
15c6-1 under the Securities Exchange Act of 1934 (``Exchange Act'') 
which, effective June 7, 1995, will shorten the standard timeframe for 
settling securities transactions from five to three business days. The 
shorter settlement period will, among other things, reduce the 
potential for systemic risk, promote efficient and liquid markets, and 
foster investor confidence in the U.S. securities markets. The 
Commission took this step recognizing that the implementation of faster 
settlement of securities transactions would require considerable 
effort, including other changes in the clearance and settlement 
process. Moreover, the Commission recognized that these changes would 
have wider implications for investors, securities markets, and 
financial intermediaries.\1\ Even before the Commission proposed to 
require faster settlement of securities transactions, commenters 
overwhelmingly expressed concern that changes in the settlement cycle 
should not also result in mandatory elimination of the stock 
certificate.\2\ In response to these concerns, the Commission noted in 
the release proposing Rule 15c6-1 that ``the proposed rule should not 
affect the ability of individual investors to obtain a physical 
certificate. Individual investors who desire to maintain record 
ownership in certificate form still will be able to do so.''\3\
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    \1\See Securities Exchange Act Release No. 33023 (October 6, 
1993), 58 FR 52891 (October 13, 1993) (hereinafter cited as ``T+3 
Adopting Release'').
    \2\See Securities Exchange Act Release No. 31904 (March 1, 
1993), 58 FR 11806, 11808. The stock certificate evidences that the 
owner is registered on the books of the issuer as a shareholder. 
Because the certificate is a negotiable instrument under state 
commercial laws, it allows the registered owner to deliver the 
bundle of rights it represents to a third party without first having 
to change the registration on the books of the issuer. Guttman, 
Modern Securities Transfer,  1.01 at 1-2 (Warren, Gorham & Lamont 
1987).
    State commercial laws specify rules concerning the transfer of 
the rights that constitute securities and the establishment of those 
rights against the issuer and other parties. Official comment to 
Sec. 8-101, The American Law Institute and National Conference of 
Commissioners of Uniform State Laws, Uniform Commercial Code, 1990 
Official Text with Comments, Article Eight at 708 (West 1991).
    The American Law Institute and National Conference of 
Commissioners on Uniform State Laws recently approved a revision to 
Uniform Commercial Code (``UCC'') Article Eight. See Mooney, Jr., 
Rocks, Schwartz, An Introduction to the Revised U.C.C. Article 8 and 
Review of Other Recent Developments with Investment Securities, 49 
The Business Lawyer 1891 (August 1994).
    \3\Securities Exchange Act Release No. 31904 (February 23, 
1993), 58 FR 11806.
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    Sparked by investor trends away from requesting physical 
certificates,\4\ several corporations and transfer agents\5\ that 
maintain their shareholder records want to expand their use of 
automated systems for recording ownership of securities and related 
transfer processing. As described below, they would offer shareholders 
who opt for direct registration the opportunity to receive an account 
statement instead of a negotiable certificates,\6\ the opportunity to 
obtain a certificate upon demand, and the opportunity to direct the 
transfer of the underlying position to a broker-dealer upon request. 
For this system to be successful, broker-dealers, transfer agents and 
clearing agencies must cooperate to establish the systems and 
communication facilities to facilitate these services.
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    \4\Individual investors can choose to be registered directly on 
the issuer's register or they can engage a broker-dealer or bank to 
act as the custodian of their investment portfolios. The use of a 
broker-dealer or bank as a custodian typically is referred to as 
``street name'' registration. See Final Report of the Securities and 
Exchange Commission on The Practices of Recording the Ownership of 
Securities in the Records of the Issuer in Other Than the Name of 
the Beneficial Owner of Such Securities (December 3, 1976); Report 
on Improving Communication Between Issuers and Beneficial Owners of 
Nominee held Securities (June 1982). Securities held in street name 
typically are on deposit with a securities depository where the 
broker-dealer or bank (or its agent) participate. Securities 
depositories for corporate equity securities include The Depository 
Trust Company, The Depository Trust Company of Philadelphia, and The 
Midwest Securities Trust Company. These depositories are limited 
purpose trust companies, members of the Federal Reserve System, and 
registered clearing agencies under the Exchange Act. In addition to 
holding securities for their members (accepting deposits and 
processing withdrawals), depositories provide book-entry delivery 
and dividend and interest collection and payment services. In 1992, 
the ratio of book-entry deliveries to certificate withdrawals was 
12.9:1, almost six times greater than the 1982 ratio (2.3:1). See 
U.S. Securities and Exchange Commission, 1993 Annual Report (1994) 
at 125.
    \5\Transfer agents are an integral component of the clearance 
and settlement process. There are approximately 1,576 registered 
transfer agents that maintain, on behalf of the issuers of 
securities, the official register of stockholders or bondholders. 
Transfer agents issue negotiable certificates evidencing security 
ownership, communicate on behalf of issuers with securityholders, 
and record changes in security ownership as a result of securities 
transactions.
    \6\The use of account statements instead of negotiable 
instruments is commonplace for investment products, such as 
securities issued by open-ended investment companies, and is 
mandatory for investors who own U.S. Treasury bills, bonds, and 
notes. Many open-end investment companies deal directly with 
investors. They or their transfer agents maintain automated 
ownership records and issue periodic statements to the owners 
indicated on those records. Most of these companies also have 
broker-dealers and other financial intermediaries as registered 
owners who act as nominees for their customers. Under this 
arrangement, the ultimate investor receives a statement reflecting 
his or her portfolio from the nominee. The U.S. Department of the 
Treasury no longer issues negotiable certificates evidencing 
ownership of negotiatiable bonds, bills, and notes. Instead, 
individual investors seeking direct registration can open accounts 
under the ``Treasury Direct'' program. See Department of the 
Treasury Direct Program, 31 CFR 357.
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    The Commission is encouraged by these developments and believes 
that in general, the direct registration concept is consistent with 
Congressional objectives in section 17A(a)(1) of the Exchange Act.\7\ 
The Commission is soliciting comment on what steps are necessary to 
further such initiatives, including whether it would be appropriate to 
estabish turnaround, audit, or other standards to foster investor 
confidence in the safety and efficiency of resulting systems.
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    \7\See 15 USC 78q-1(a)(1).
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I. The Direct Registration Concept

A. Historical Background

    Over the past ten years, regulators, representatives of private 
industry, and the transfer agent community have worked together to 
explore alternatives to maintaining ownership interest in securities 
without reliance on negotiable securities certificates. For example, on 
February 25 and 26 and March 8, 1985, the Division of Market Regulation 
(``Division'') held ``Securities Immobilization Workshops'' to discuss 
the use of central depositories to immobilize securities certificates 
and the development of book-entry systems to register securities 
ownership. Workshop participants were of the view that an alternative 
to street name registration was needed to allow direct registration 
evidenced by a negotiable securities certificate.\8\ Among other 
things, workshop participants recognized the desirability of issuing 
uncertificated securities through issuer or transfer agent operated 
book-entry systems.
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    \8\Progress and Prospects: Depository Immobilization of 
Securities and Use of Book-Entry Systems, Draft Staff Report, 
Division of Market Regulation, U.S. Securities and Exchange 
Commission (June 14, 1985) (hereinafter cited as ``Immobilization 
Report'').
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    On November 27, 1990, the Commission held a Roundtable on Clearance 
and Settlement to discuss the implementation of, and the status reports 
of, the recommendations of the Group of Thirty U.S. Working Committee 
regarding clearance and settlement.\9\ Participants at the Roundtable 
discussed, among other things, ways in which investors could obtain the 
benefits of direct registration without the issuance of securities 
certificates and without street name registration. Participants noted 
that the pressure to have securities available for settlement in a 
three-days after trade date (``T+3'') environment will increase the 
need for immobilizing securities certificates and the use of book-entry 
transfer at the retail level. Thus, participants recognized the value 
of developing a transfer agent operated book-entry registration system 
as an alternative to street name registration.
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    \9\In March 1989, the Group of Thirty released a report which 
offered nine recommendations for reducing risk and improving 
efficiency in the clearance and settlement systems in the world's 
corporate securities markets. Clearance and Settlement Systems in 
the World's Securities Markets, Group of Thirty New York and London 
(1989). Those recommendations are described in an appendix to the 
T+3 Adopting Release. Supra note 1, at Appendix 2 at n.6, 58 FR 
52905 n.6. Subsequently, U.S. Steering and Working Committees were 
formed to study the existing systems in the United States and to 
recommend appropriate changes based upon the Group of Thirty's nine 
recommendations. In November 1990, the U.S. Working Committee, Group 
of Thirty, Clearance and Settlement Project issued a report, 
entitled Implementing The Group of Thirty Recommendations in the 
United States. In that report, the U.S. Working Group concluded that 
the U.S. corporate clearance and settlement systems were not in 
compliance with two of the recommendations, moving to a three 
business day settlement period and adopting a same-day funds payment 
system, and that these two recommendations should be implemented in 
the U.S.
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    In August 1991, the U.S. Working Committee, Group of Thirty 
Clearance and Settlement Project, issued a report which, among other 
things, identified the DRS as an alternative to owning certificated 
securities.\10\ The report was promulgated by a Subcommittee of the 
U.S. Working Committee of the Group of Thirty, the T+3 Direct 
Registration Subcommittee, co-chaired by representatives of the 
Securities Transfer Association (``STA'') and the American Society of 
Corporate Secretaries (``ASCS''). This subcommittee viewed the DRS as 
offering investors an additional choice of security ownership in the 
form of an account statement, in which the securities would be 
registered in the name of the investor and maintained on the books of 
the issuer in a book-entry format.\11\
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    \10\Providing Alternatives to Certificates For the Retail 
Investor, U.S. Working Committee, Group of Thirty, Clearance and 
Settlement Project (August 1991).
    \11\As described in the subcommittee report, the DRS would allow 
individual investors to hold securities in electronic form, without 
putting those securities in street name at a financial intermediary, 
by providing those investors who choose to be registered on the 
books of the issuer with an optional custody arrangement with the 
transfer agent. Under DRS, if a security is registered on the books 
of the issuer, the investor would receive a statement reflecting his 
or her ownership interest. An investor would retain the option of 
selling securities through the broker of his or her choice by 
notifying the transfer agent to move the securities from the books 
of the issuer to the books of a broker-dealer. Certificates also 
would be available on request.
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    Although the U.S. Working Committee of the Group of thirty views 
DRS as an alternative form of securities ownership, it decided that 
elimination of certificates was not necessary at that time to achieve a 
shorter settlement cycle, and thus did not endorse the DRS or any 
specific book-entry system. The U.S. Working Committee, however, 
encouraged the securities transfer agent community to continue its work 
on developing a book-entry registration system.
    In 1992, the STA, the Corporate Transfer Agents Association 
(``CTAA''), and the Securities Industry Committee of ASCS formed the 
Investor Registration Option Implementation Committee (``IRO/IC'') to 
develop an issuer/transfer agent operated book-entry registration 
system. The IRO/IC developed the concept of a book-entry direct 
registration system operated by transfer agents (``DRS Concept''), 
modeling it after the systems used in dividend reinvestment and stock 
purchase programs (``DRSPPs'')\12\ which are currently offered by many 
issuers or their transfer agents. This concept would allow any retail 
investor who wants his or her securities to be registered directly on 
the books of the issuer, but does not necessarily want to receive a 
certificate, to register those securities in book-entry form directly 
on the books of the issuer.
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    \12\DRSPPs are programs offered by corporations or closed-end 
investment companies that allow participants to purchase additional 
shares of common stock by reinvesting their cash dividends and, in 
many cases, by making optional cash payments. Certain DRSPPs permit 
dividends on preferred stock and interest earned on debt securities 
to be reinvested in shares of common stock. The earliest DRSPPs were 
dividend reinvestment plans (``DRIPS'') in which participation was 
limited to issuers' shareholders and employees and through which 
additional shares could be purchased only with reinvested dividends. 
Since the first DRIPS were introduced in the last 1960s, the 
greatest changes have been in the method by which participants can 
accumulate shares (i.e., optional cash payments), and the types of 
persons that are permitted to participate (e.g., non-shareholders of 
the corporation).
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B. The DRS Concept and Cross-Industry Consensus

    After a series of discussions, the IRO/IC and the Securities 
Industry Association (``SIA'') agreed in 1994 to the basis structure of 
the DRS Concept.\13\ Agreement among transfer agents, corporations, 
broker-dealers, and banks regarding the basic structure and operational 
flows is critical because its implementation and operation must be 
efficient, safe, and largely transparent to investors. At the same 
time, issuers and transfer agents would be free to decide for 
themselves whether they wanted to offer investors the services that 
comprise DRS.
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    \13\Letter from Raymond J. Riley, Co-Chair, IRO/IC and James J. 
Volpe, Director, IRO/IC (February 16, 1994), to Jonathan Kallman, 
Associate Director, Division of Market Regulation, Commission; 
Letter from George McNamee, Chairman of Clearance and Settlement 
Committee, and John Sanders, Chairman of Operations Committee, SIA 
to Al DeMaio, et al (October 18, 1994).
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    The agreement between the IRO/IC and the SIA calls for the 
formation of a joint advisory committee to work with the registered 
securities depositories to develop an electronic communication system 
between transfer agents and depositories.\14\ This proposed system will 
allow a broker-dealer to deliver electronically to a transfer agent a 
customer's request that the securities be registered on the books of 
the issuer in book-entry form. The proposed electronic system also will 
allow the transfer agent to send an electronic acknowledgment to the 
broker-dealer that the securities have been registered in the 
customer's name on the books of the issuer in book-entry form.
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    \14\The IRO/IC and the SIA agreed to the following six points:

    1. Customers will be able directly or through their broker-
dealers to request a certificate electronically or otherwise at the 
time of initial purchase.
    2. Electronic acknowledgment that the securities have been 
registered in book-entry form will be provided to the broker-dealer 
with a written record of ownership forwarded to the customer. 
Electronic communications between the issuer/transfer agent and the 
depositories must be standardized.
    3. Investor direct movement of securities will be provided in 
electronic form from the books of the issuer to the books of the 
investor's broker-dealer (which may not be the same broker-dealer 
that initially purchased the shares on behalf of the customer).
    4. Transfer agents will not use the shareholder list of one 
issuer to solicit those shareholders to buy shares of other issuers 
for which they act as transfer agent.
    5. The IRO/IC and the SIA will form a joint advisory group to 
work with the depositories to identify and design a process that 
will allow the investor to instruct the transfer agent, through the 
broker-dealer, to register shares on the books of the issuer in 
book-entry form or to request a certificate. If an investor fails to 
choose an option, the transfer agent will register the securities on 
the books of the issuer in book-entry form.
    6. The IRO/IC and the SIA will develop educational materials and 
the programs to inform the brokerage community and customers about 
the various forms of registration options, e.g., direct registration 
evidenced by negotiable certificates, direct registration evidenced 
by account statements, and indirect registration through a broker-
dealer.
    The Commission invites comment as to whether the terms of the 
agreement are consistent with the Exchange Act and whether any of 
these terms impose a burden on competition. If commenters believe 
one or more of these terms imposes a burden on competition, please 
describe whether that burden is nonetheless necessary or appropriate 
to achieve the goals of the Exchange Act.
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    Under the DRS Concept, assuming the issuer and transfer agent elect 
to offer DRS services, an investor may instruct the broker-dealer at 
the time of purchase to register the securities directly on the books 
of the issuer, to leave the securities with his broker in street name, 
or to request a certificate.\15\ If an investor does not choose an 
option, the securities will be registered on the books of the issuer in 
book-entry form as the default form of registration. Assuming DRS 
services are offered, an investor also may establish a DRS account, or 
credit additional securities to his or her DRS account, by submitting 
physical certificates to the transfer agent. In addition, issuers and 
transfer agents could offer an option to non-shareholders to make 
initial cash payments to the transfer agent thereby allowing an 
investor with no prior relationship to the issuer to purchase shares 
and participate in the DRS.\16\
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    \15\If the issuer and transfer agent determines to provide DRS 
services, investors could still choose between street name and 
direct registration. Investors who choose direct registration would 
receive negotiable certificates as a matter of course.
    \16\Where an issuer or affiliate is offering securities, 
compliance with the registration provisions of the Securities Act of 
1933 (``Securities Act'') is required absent an exemption (e.g., 
section 5 of the Securities Act (15 U.S.C. 77e (1993)), as in 
compliance with such other requirements as section 15(a) of the 
Exchange Act (15 U.S.C. 78o(a) (1993)) and Rule 10b-6 under section 
10(b) of the Exchange Act (17 CFR 240.10b-6). See also Letter re: 
The Securities Transfer Association, Inc. (December 1994) Letter re: 
First Chicago Trust Company of New York (December 1994).
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    Under the DRS Concept the broker-dealer would communicate its 
customers' registration option to the transfer agent through an 
electronic communication link (e.g., computer to computer 
transmissions) established with the depositories. Once the transfer 
agent registers the securities on the books of the issuer, the transfer 
agent would send an electronic acknowledgement of the registration to 
the broker-dealer through the depository and would send an account 
statement directly to the investor reflecting the number of securities 
purchased. All subsequent securityholder communications, including 
proxy solicitations, would be sent directly to the investor from the 
transfer agent. The transfer agent would vote the securities in 
accordance with the instructions received from the DRS participant. DRS 
participants would have the option of either receiving their cash 
dividends, or, if the issuer offers a DRSPP, reinvesting their cash 
dividends in the purchase of new securities. Any dividends in the form 
of securities, or any securities resulting from a stock split owed to a 
DRS participant, would be credited to the DRS participant's account. As 
with other DRSPPs today, no certificates would be issued unless the DRS 
participant makes a specific request for certificates by phone, 
facsimile, or mail.

II. Discussion

    In light of the faster settlement processing standards that will be 
imposed on retail customers in the T+3 environment, the Commission 
believes that investors should have the choice to register their 
securities in book-entry form directly on the books of the issuer 
evidenced by an account statement.\17\ The Commission believes that 
such an alternative is consistent with Congressional objectives in 
section 17A(a)(1)(C) of the Exchange Act;\18\ new data processing and 
communication techniques create the opportunity for more efficient, 
effective, and safe procedures for clearance and settlement. Although 
the SIA and the transfer agent community have agreed on the general 
design of the electronic communication system, the Commission 
understands that they have technical issues to resolve before the 
securities depositories can provide the specifications to build the 
electronic communication system that would allow the movement of 
securities between transfer agents and broker-dealers.\19\ The 
Commission urges the SIA, the transfer agent community, and the issuer 
community, in cooperation with the depositories, to design the 
electronic communication system, to build and test that system, and to 
implement the DRS prior to the June 7, 1995 implementation date for T+3 
settlement.\20\ 
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    \17\Subject to an issuer's determination of whether to make 
certificates available shareholders, the Commission believes 
investors should be able to obtain negotiable certificates on 
request. (State corporate laws generally entitle shareholders to 
obtain certificates evidencing their investment. See e.g. 8 Del. 
Code Ann. General Corporation Law Sec. 158 (1991); N.Y. Bus. Corp. 
Law Sec. 508 (McKinney 1986)). The Commission continues to believe 
that faster trade settlements should not require investors to forego 
the benefits or direct registration or the opportunity to receive a 
negotiable certificate evidencing their investment. The Commission 
notes that Rule 15c6-1 does not require customers to leave funds, 
securities, or both subject to the broker-dealers' possession or 
control. Although in announcing the adoption of Rule 15c6-1, the 
Commission noted that broker-dealers ``could encourage clients to 
deposit funds or securities * * * upon placing an order, or to send 
funds and securities that day,'' and although financial management 
accounts have gained in popularity for various reasons, the 
Commission advises broker-dealers to be careful not to represent to 
their customers that the rule requires customers to leave securities 
or funds with broker-dealers after trade settlement.
    \18\See 15 USC 78q-1(a)(1)(C).
    \19\The SIA stated that while there are unresolved technical 
questions, none appear insurmountable. Letter from John J. Sanders, 
Jr., Chairman, Operations Committee, SIA, and George C. McNamee, 
Chairman, Clearance and Settlement Committee, SIA, to Al DeMaio, The 
Midwest Securities Trust Company; Ron Burns, The Depository Trust 
Company; and Keith Kessel, Philadelphia Depository Trust Company 
(October 18, 1994).
    \20\The Commission notes that Division staff today have issued 
correspondence regarding a proposed expansion of shareholder 
services that incorporates some of the DRS features. See Letter re: 
First Chicago Trust Company of New York (December 1994).
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    The Commission believes that the proposed agreement on the DRS 
concept and the electronic link between transfer agents and 
depositories necessary for timely and effective communication with 
broker-dealers should enhance the efficiency of the clearance and 
settlement system. Because the Commission is concerned about the 
parties' ability to implement the system promptly and to follow through 
on their commitments, the Commission invites commenters to address 
whether the Commission or the self-regulatory organizations should take 
a more active role in facilitating education regarding the registration 
and safekeeping alternatives available to investors. Comments are also 
requested as to whether the Commission should require broker-dealers to 
disclose to customers at the time an account is opened that direct 
registration is available as an alternative to street name 
registration; what that disclosure might include; and whether 
additional periodic disclosures should be required after the account is 
opened.
    In addition, the Commission requests comment as to whether transfer 
agents that provide the DRS or other uncertificated recordkeeping 
functions should be subject to increased regulatory oversight to 
minimize any disruption of the marketplace and to provide greater 
efficiency to the clearance and settlement system. For example, is 
there a need for a Commission rule to prevent transfer agents from 
using shareholder lists without issuer consent for any purpose other 
than the transfer of that company's securities? To foster the efficient 
operation of the DRS and to minimize any adverse effects on the 
secondary market and the national clearance and settlement system, 
should transfer agents that participate in the DRS be required to join 
at least one of the registered securities depositories for the purposes 
of performing the DRS functions?
    The Commission believes that safe and efficient transfer agent 
performance is critical to efforts by the securities industry to 
provide alternative registration options. Transfer agent operated book-
entry systems, including the DRS, pose different and potentially 
increased risks to investors. For example, increased reliance on the 
records of transfer agents may place additional burdens on transfer 
agents and could increase the risks to investors arising from 
substandard transfer agent performance. Accordingly, commenters are 
urged to review the companion release issued today, which invites 
comment on the need for new and revised rules governing transfer agent 
activities in light of the proposed DRS Concept, DRSPPs, and custodial 
arrangements with registered securities depositories to hold securities 
registered in the name of those depositories in book-entry form 
(``uncertificated recordkeeping functions'').\21\ For example, the 
companion release invites comment on whether the Commission should 
develop additional processing, bookkeeping, net worth, and insurance 
requirements for transfer agents that perform uncertificated 
recordkeeping functions.
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    \21\See Securities Exchange Act Release No. 35040 (December 1, 
1994) (hereinafter referred to as ``companion release''). This 
discussion is limited to transfer agent regulation and does not 
address the application of the broker-dealer registration provisions 
of the Exchange Act to the DRS or DRSPPs. Some of the activities in 
connection with the DRS or DRSPPs may raise broker-dealer 
registration issues under section 15(a) of the Exchange Act.
    Section 15(a) of the Exchange Act generally provides that a 
``broker'' or ``dealer'' that uses the mails or any means of 
interstate commerce to effect transactions in, or to induce or 
attempt to induce the purchase or sale of, any security must 
register with the Commission, unless an exemption applies. Section 
3(a)(4) of the Exchange Act defines a ``broker'' as any person 
(other than a bank) engaged in the business of effecting 
transactions in securities for the account of others. A ``dealer'' 
is defined in section 3(a)(5) of the Exchange Act as any person 
(other than a bank) engaged in the business of buying and selling 
securities for its own account, whether through a broker or 
otherwise.
    Broker-dealer registration serves to minimize the risks 
typically associated with the execution of securities orders and the 
handling and custody of funds and securities. The Commission's 
financial responsibility rules applicable to registered broker-
dealers, for example, are designed to provide safeguards with 
respect to customer funds and securities held by broker-dealers by 
ensuring the accountability of those funds and securities and by 
requiring the maintenance of accurate books and records and 
sufficient liquid assets. See, e.g., 17 CFR 240.15c3-3 (prohibiting 
a broker-dealer from using customer funds to finance its business, 
except as related to customer transactions); 17 CFR 240.15c3-1 
(prescribing minimum capital standards for broker-dealers).
    In general, registered broker-dealers also must become members 
of the Securities Investor Protection Corporation (``SIPC''). SIPC 
was established by Congress as a means to protect investors' funds 
and securities held by broker-dealers that undergo liquidation. In 
addition, registered broker-dealers are subject to the rules of the 
self-regulatory organizations (``SROs'') of which they are required 
to be members under section 15(b)(8) of the Exchange Act. SRO rules, 
among other things, are designed to ensure the maintenance of high 
standards of ethical conduct and the observance of just and 
equitable principles of trade.
    In instances where an issuer performs some of the functions 
discussed above in connection with its DRSPP, the staff has 
determined that registration as a broker-dealer is not necessary if 
the issuer limits its activities as described in Letter re: 
Securities Transfer Association (December 1994) or if the issuer 
delegates such functions to a registered broker-dealer or to a 
``bank,'' as that term is defined in section 3(a)(6) of the Exchange 
Act.
    Questions concerning broker-dealer registration should be 
directed to the Office of Chief Counsel, Mail Stop 7-10, Division of 
Market Regulation, Securities and Exchange Commission, Washington, 
DC 20549.
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III. Request for Comment

    The Commission is interested in receiving comment on all aspects of 
the DRS Concept in addition to the specific requests for comment made 
in this release.

    Dated: December 1, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30124 Filed 12-17-94; 8:45 am]
BILLING CODE 8010-01-P