[Federal Register Volume 60, Number 112 (Monday, June 12, 1995)]
[Notices]
[Pages 30909-30910]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-14253]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35798; File Nos. SR-Amex-95-17; SR-BSE-95-09; SR-CHX-
95-12; SR-NASD-95-24; SR-NYSE-95-19; SR-PSE-95-14; SR-PHLX-95-34]


Self-Regulatory Organizations; American Stock Exchange, Inc.; 
Boston Stock Exchange, Incorporated; Chicago Stock Exchange 
Incorporated; National Association of Securities Dealers, Inc.; New 
York Stock Exchange, Inc.; the Pacific Stock Exchange Incorporated; 
Philadelphia Stock Exchange, Inc., Order Approving on an Accelerated 
Basis Proposed Rule Changes Regarding Depository Eligibility 
Requirements

June 1, 1995.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ the above-referenced self-regulatory organizations 
(``SROs'') filed proposed rule changes \2\ with the Securities and 
Exchange Commission (``Commission'') regarding depository eligibility 
requirements for issuers. Notices of the proposed rule changes were 
published in the Federal Register to solicit comments from interested 
persons.\3\ No comment letters were received. For the reasons discussed 
below, the Commission is approving the proposed rule changes on an 
accelerated basis to be effective on June 7, 1995.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Proposed rule changes were filed with the Commission by each 
SRO in conjunction with substantially similar proposals by the other 
SROs as follows: American Stock Exchange, Inc. (``Amex'') on May 16, 
1995; Boston Stock Exchange, Incorporated (``BSE'') on May 18, 1995; 
Chicago Stock Exchange Incorporated (``CHX'') on April 26, 1995; 
National Association of Securities Dealers, Inc. (``NASD'') on May 
19, 1995; New York Stock Exchange, Inc. (``NYSE'') on May 16, 1995; 
The Pacific Stock Exchange Incorporated (``PSE'') on May 15, 1995; 
and Philadelphia Stock Exchange, Inc. (``PHLX'') on May 19, 1995. On 
May 18, 1995, PHLX amended its proposed rule change to conform to 
the rule changes filed by the other SROs. Letter from Sharon S. 
Metzger, PHLX, to Christine Sibille, Senior Counsel, Division of 
Market Regulation, Commission (May 18, 1995).
    \3\ Securities Exchange Act Release Nos. 35734 (May 18, 1995), 
60 FR 27571 (Amex); 35735 (May 18, 1995), 60 FR 27572 (BSE); 35711 
(May 12, 1995), 60 FR 27357 (CHX); 35774 (May 26, 1995), 60 FR 28813 
(NASD); 35773 (May 26, 1995), 60 FR 28817 (NYSE); 35740 (May 19, 
1995), 60 FR 27996 (PSE); 35772 (May 26, 1995), 60 FR 28815 (PHLX).
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I. Description of the Proposal

    Under the rule changes,\4\ each SRO will adopt a depository 
eligibility rule \5\ for issuers that desire to have their securities 
listed on a national securities exchange or be eligible for inclusion 
in the Nasdaq Stock Market (``Nasdaq'').\6\ The rule changes will 
require issuers to represent to a national securities exchange or the 
NASD that the CUSIP number identifying the securities \7\ to be listed 
on such exchange or to be eligible for inclusion in Nasdaq has been 
included in the file of eligible issues maintained by a securities 
depository registered as a clearing agency under Section 17A of the 
Act.\8\ This requirement will not apply to a security if the terms of 
such security cannot be reasonably modified to meet the criteria for 
depository eligibility at all securities depositories.

    \4\ The uniform rule has been developed by the Legal and 
Regulatory Subgroup of the U.S. Working Committee of the Group of 
Thirty in coordination with each of the national securities 
exchanges and the NASD.
    \5\ Rule 777 (Amex); Chapter III, Section 8(a) (BSE); Rule 7(J) 
(CHX); Part II, Section 1 (c)(23) of Schedule D to the NASD by-laws 
(``By-laws'') and Section 11 of the Uniform Practice Code (``UPC'') 
(NASD); Rule 227 (NYSE); Rule 5.9(d) (PSE); and Rule 853 (PHLX).
    \6\ In addition to the adoption of the uniform depository 
eligibility rule for inclusion in the By-laws, the NASD has amended 
the definition of ``depository eligibility'' set forth in Section 11 
of the UPC consistent with the uniform depository eligibility rule. 
The NASD had to amend the definition of ``depository eligibility'' 
because the NASD's depository settlement rule applies to all NASD 
members regardless of where the securities are listed. In 
comparison, each exchange's depository settlement rule only applies 
to transactions in the securities listed on that exchange.
    \7\ This requirement does not apply to American Depositary 
Receipts for securities of a foreign issuer (Amex, BSE, CHX, NYSE, 
PSE, and PHLX) or securities of a Canadian issuer (NASD).
    \8\ 15 U.S.C. 78q-1 (1988). [[Page 30910]] 
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    The rule changes set forth additional requirements that must be met 
before a security will be deemed to be ``depository eligible,'' within 
the meaning of the SROs' ``uniform book-entry settlement rules.'' \9\ 
The new rules specify different requirements for depository eligibility 
depending upon whether a new issue is distributed by an underwriting 
syndicate before or after the date a securities depository system is 
available for monitoring repurchases of the distributed shares by 
syndicate members (``flipping tracking system'').\10\ Prior to the 
availability of a flipping tracking system, the managing underwriter 
may delay the date a security is deemed ``depository eligible'' for up 
to three months after trading has commenced in the security. After the 
availability of a flipping tracking system, a new issue will be deemed 
to be depository eligible upon commencement of trading on a national 
securities exchange or Nasdaq.

    \9\ Each SRO has a uniform book-entry settlement rule which 
generally requires SRO members to use the facilities of a securities 
depository for the book-entry settlement of all transactions in 
depository-eligible securities with another financial intermediary 
(e.g. a broker, dealer, or bank) or institutional customer. See, 
e.g., Amex Rules, Part IV, Section 3, Rule 776; UPC Section 11; and 
NYSE Rule 226.
    \10\ Currently, a flipping tracking system is being developed 
that will include a securities depository service that (i) can be 
activated upon the request of the managing underwriter for a period 
of time that the managing underwriter specifies, (ii) in certain 
circumstances, will require the delivering participant to provide to 
the depository information sufficient to identify the seller of such 
shares as a precondition to the processing of book-entry delivery 
instructions for distributed shares, and (iii) will report to the 
managing underwriter the identity of any other syndicate member or 
selling group member whose customer(s) sold distributed shares (but 
will not report to the managing underwriter the identity of such 
customer[s]) and, in certain circumstances, will report to such 
syndicate member or selling group member the identity of such 
customer(s).
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II. Discussion

    The Commission believes that the rule changes are consistent with 
Sections 6(b)(5) \11\ and 15A(b)(6) \12\ of the Act. Sections 6(b)(5) 
and 15A(b)(6), among other things, require that the rules of a national 
securities exchange and a national securities association, 
respectively, be designed to remove impediments to and perfect a 
national market system, and in general, to protect investors and the 
public interest. The depository-eligibility requirement should limit 
market impediments arising from the physical delivery of securities and 
thereby should promote the perfection of a national market system. 
Further, the rule changes should serve to increase the efficiency of 
the U.S. clearance and settlement system and thereby should reduce the 
risks associated with that system and should serve to better protect 
investors and the public interest.

    \11\ 15 U.S.C. 78f(b)(5) (1988).
    \12\ 15 U.S.C. 78o-3(b)(6) (1988).
    Furthermore, the Commission believes the rule changes should 
promote the purposes of Section 17A of the Act.\13\ In Section 17A, 
Congress called for the establishment of a national system for the 
prompt and accurate clearance and settlement of securities 
transactions. In Section 17A(e),\14\ Congress directed the Commission 
to use its authority to end the physical movement of securities 
certificates in connection with the settlement among brokers and 
dealers of transactions in securities.

    \13\ 15 U.S.C. 78q--1 (1988)
    \14\ 15 U.S.C. 78q-1(e) (1988).
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    Book-entry settlement of interdealer securities transactions has 
been a goal since Congress enacted the Securities Acts Amendments of 
1975.\15\ Since 1975, substantial progress has been made in reducing 
the flow of physical certificates for settlement of interdealer and 
institutional securities transactions.\16\ In 1993, the Commission 
approved the uniform book-entry settlement rules applicable to 
transactions in depository eligible securities between SRO members and 
their customers when the SRO member extends certain credit privileges 
(i.e., delivery versus payment) as a means to facilitate the conversion 
from a five-day settlement cycle to a three-day settlement cycle,\17\ 
which is set to occur June 7, 1995.\18\ The present rule changes are 
designed to facilitate efficient and timely settlement of trades 
through the various market facilities and to further aid the transition 
to a three-day settlement cycle by increasing the number of depository-
eligible securities.\19\ The uniform depository-eligibility requirement 
should reduce costs, risks, and delays associated with the physical 
delivery of securities certificates and should eliminate many of the 
labor intensive functions associated with physical deliver of 
nondepository eligible securities.

    \15\ Pub. L. No. 94-29, 89 Stat. 97 (1975) (codified at 15 
U.S.C. 77-80H (1988)).
    \16\ E.g., Securities Exchange Act Release Nos. 22021 (September 
23, 1983), 48 FR 45167 (order granting full registration to nine 
clearing agencies); 19698 (April 15, 1983), 48 FR 17604 (order 
implementing The Depository Trust Company's (``DTC'') Fast Automated 
Securities Transfer program); 30283 (January 23, 1992), 57 FR 3658 
(order implementing DTC's Deposit/Withdrawal at Custodian program); 
30505 (March 20, 1992), 57 FR 10683 (order eliminating DTC's 
Certificate on Demand service for most corporate issues); 31645 
(December 23, 1992), 57 FR 62407 (order approving rule change 
requiring that most interdealer transactions in municipal securities 
be settled by book-entry through a depository); and 32455 (June 11, 
1993), 58 FR 33679 (order approving uniform book-entry settlement 
rules).
    \17\ Securities Exchange Act Release No. 32455 (June 11, 1993), 
58 FR 33679 (order approving uniform book-entry settlement rules).
    \18\ Securities Exchange Act Release Nos. 33023 (October 6, 
1993), 58 FR 52891 (adoption of Rule 15c6-1) and 34952 (November 9, 
1994), 59 FR 59137 (change of effective date of Rule 15c6-1 from 
June 1, 1995 to June 7, 1995).
    \19\ While the proposed rule changes should serve to further 
reduce the number of transactions in depository-eligible securities 
for which settlement is effected by the delivery of physical 
certificates, the rule changes will not eliminate the ability of 
investors to obtain physical certificates after settlement of the 
transaction. As the Commission recently noted, subject to an 
issuer's determination whether to make physical certificates 
available to shareholders, the Commission believes investors should 
be able to obtain negotiable certificates on request. Securities 
Exchange Act Release No. 35038, (December 1, 1994) at note 17.
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    The SROs have requested that the Commission find good cause for 
approving the proposed rule changes 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 changes in order that 
they become effective on June 7, 1995, contemporaneously with the 
conversion to a three-day settlement cycle.\20\

    \20\ Supra note 17 and accompanying Text.
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III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposals are consistent with Sections, 6, 15A, and 17A of the Act and 
the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule changes (File Nos. SR-Amex-95-17, SR-
BSE-95-09, SR-CHX-95-12, SR-NASD-95-24, SR-NYSE-95-19, SR-PSE-95-14, 
and R-PHLX-95-34) be and hereby are approved for effectiveness on June 
7, 1995.

    \21\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\22\

    \22\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-14253 Filed 6-9-95; 8:45 am]
BILLING CODE 8010-01-M