[Federal Register Volume 60, Number 54 (Tuesday, March 21, 1995)]
[Notices]
[Pages 14990-14991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6841]



[[Page 14990]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35484; File No. SR-MSTC-94-21]


Self-Regulatory Organizations; Midwest Securities Trust Company; 
Order Granting Accelerated Approval of a Proposed Rule Change 
Establishing an Automated Program for the Transfer of Certain 
Securities Between the Midwest Securities Trust Company and Transfer 
Agents

March 14, 1995.
    On December 28, 1994, the Midwest Securities Trust Company 
(``MSTC'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-MSTC-94-21) under 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')\1\ to 
establish an automated program for the transfer of certain securities 
between MSTC and transfer agents. Notice of the proposal was published 
in the Federal Register on March 6, 1995.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is approving 
the proposed rule change on an accelerated basis.

    \1\15 U.S.C. 78(b)(1) (1988).
    \2\Securities Exchange Act Release No. 35424 (February 28, 
1995), 60 FR 12258.
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I. Description

    MSTC is establishing an automated program, to be known as ATS, for 
the transfer of certain securities between MSTC and transfer agents. 
Under MSTC's program, MSTC and the transfer agents participating in the 
program will use a master balance certificate\3\ to evidence the number 
of securities of a particular issue transferred into or out of MSTC and 
through the transfer agents. The transfer agents will have custody of 
the securities in the form of balance certificates registered in MSTC's 
nominee name. The balance certificates will be adjusted daily to 
reflect MSTC's withdrawal and deposit activity.

    \3\For the purpose of the ATS program, ``balance certificates'' 
shall mean a certificate registered in the name Kray & Co., which is 
MSTC's nominee name, which evidences (1) record ownership by Kray & 
Co. of the number of shares or units of the issue shown from time to 
time on the records of the issuer thereof or (2) 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 a 
transfer agent, as being evidenced by such certificate, which 
certificate shall be retained by a transfer agent.
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    Previously, if a participant requested the withdrawal of one 
hundred shares of a security from MSTC, MSTC would send an electronic 
or written instruction to the transfer agent followed by a physical 
transfer of the shares from MSTC to the transfer agent. The transfer 
agent would reissue the shares in the requested name and would send the 
shares back to MSTC. Using the ATS program, an electronic instruction 
will immediately effectuate the withdrawal transfer, eliminating the 
extra step of physically transferring the security from MSTC to the 
transfer agent.
    For issues eligible for ATS, MSTC will deliver to participating 
transfer agents nominee and/or non-nominee certificates\4\ for each 
issue. The transfer agent will cancel the certificates delivered and 
issue one or more balance certificates per issue in the name of Kray & 
Co. The transfer agent will retain possession of the balance 
certificates, holding them in a secured area at all times, and MSTC 
will be provided a sample balance certificate for each issue.

    \4\For the purpose of the ATS program, the term ``nominee 
certificates'' shall mean a certificate of an issue registered in 
the name of Kray & Co. The term ``non-nominee certificate'' shall 
mean a certificate of an issue registered in a name other than Kray 
& Co.
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    MSTC will deliver to participating transfer agents nominee 
certificates and/or non-nominee certificates with the instructions to 
register the non-nominee certificates into the name of Kray & Co. and 
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. MSTC also may issue instructions to the 
transfer agent to register the transfer of securities evidenced by a 
balance certificate to a name other than Kray & Co. or to issue a 
certificate to a name other than Kray & 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 MSTC to be registered in the name Kray & Co. less any 
transfers and issuance of certificates in a name other than Kray & Co. 
The transfer agent will confirm in writing, on a daily or other 
periodic basis as MSTC may reasonably request, the number of securities 
evidenced by each balance certificate.
    The obligations of the ATS transfer agents and MSTC will be set 
forth in a Balance Certificate Agreement (``Agreement'') executed by 
each ATS transfer agent and MSTC.\5\ 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 
pursuant to ATS will be the sole property of MSTC. The transfer agent 
will not obtain any legal or equitable right, title, or interest in or 
to such securities evidenced by the balance certificates.

    \5\If a transfer agent employs a processor to perform the 
transfer agent's duties in ATS, the transfer agent and processor 
must enter into a separate agreement obligating the processor to 
perform the duties described in the Agreement. The transfer agent 
must notify MSTC 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 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. MSTC only will 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, the actions 
were taken by, or the obligations were those of the transfer agent.
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    The Agreement also provides that upon request from MSTC, 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 
MSTC 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 MSTC or held by the transfer agent 
pursuant to ATS. 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 MSTC's satisfaction evidence that such blanket 
bond or comparable plan of insurance is in full effect.\6\ 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 MSTC. 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 MSTC if the aggregate value of the shares to be 
delivered exceeds the amount of the bankers blanket bond. The transfer 
agent will instead deliver [[Page 14991]] or make available the 
certificates as promptly as possible.\7\

    \6\The transfer agent may limit, decrease, or cancel the blanket 
bond protection upon thirty days prior notice of such action to 
MSTC.
    \7\Before delivering to MSTC 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 MSTC to register the transfer of securities 
evidenced by a balance certificate in a name other than MSTC will 
constitute a presentation of the balance certificate to the transfer 
agent under applicable law. The same warranties that would apply if 
MSTC physically presented the balance certificate to the transfer agent 
will be applicable in this instance.

II. Discussion

    The Commission believes that MSTC's proposal is consistent with 
Section 17A of the Act\8\ and specifically with Sections 17A(b)(3)(A) 
and (F).\9\ 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.

    \8\15 U.S.C. 78q-1 (1988).
    \9\15 U.S.C. 78q-1(b)(3)(A) and (F) (1988).
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    Under MSTC's proposed rule change, an electronic instructions will 
replace the physical transfer of securities between MSTC and transfer 
agents. 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 
MSTC and the transfer agent. The transfer of securities will be factor 
and more efficient with the likely effect of reducing costs related to 
the preparation of written instructions and physical delivery of the 
securities. MSTC's proposed rule change also should help MSTC fulfill 
its safekeeping obligations by allowing MSTC to maintain securities in 
a form which should reduce the chances of loss and theft.
    MSTC's proposed rule change requires that the transfer agent be 
insured by a customary bankers blanket bond which will cover any 
securities received from MSTC and/or held by the transfer agent or 
processor on behalf of MSTC 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 MSTC. These insurance 
requirement should better enable MSTC to safeguard securities which are 
at the transfer agent or are in transit from the transfer agent to MSTC 
and should aid in the safekeeping of securities with a market value in 
excess of the bankers blanket bond.
    MSTC has requested that the Commission find good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice of the filing. The Commission finds good 
cause for so approving the proposed rule change because the ATS program 
allows for an electronic communication between brokers and transfer 
agents through MSTC. Such communication will be necessary for transfer 
agents to participate in the direct registration system (``DRS'') 
recently proposed by the Commission.\10\ The Commission believes it is 
prudent to allow MSTC to begin use of the ATS as soon as possible in 
order that MSTC and its participants will have time to become 
proficient in using such a system before a DRS is implemented. The 
Commission also believes that accelerated approval will allow MSTC 
participants to utilize and to take full advantage in a more timely 
fashion of the benefits of the ATS service.

    \10\For a complete description of DRS, refer to Securities 
Exchange Act Release No. 35038 (December 1, 1994), 59 FR 63652 [File 
No. S7-34-94] (concept release soliciting comment on a transfer 
agent operated book-entry registration system).
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III. Conclusion

    The Commission finds that MSTC'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-MSTC-94-21) be, and hereby 
is, approved on an accelerated basis.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-6841 Filed 3-20-95; 8:45 am]
BILLING CODE 8010-01-M