[Federal Register Volume 61, Number 45 (Wednesday, March 6, 1996)]
[Notices]
[Pages 8991-8995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5155]



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[[Page 8992]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36897; File No. SR-DTC-95-27]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Proposed Rule Change Seeking to Implement the Initial Public 
Offering Tracking System

February 27, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ notice is hereby given that on January 2, 1996, The Depository 
Trust Company (``DTC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which items have been prepared primarily by 
DTC. On January 31, 1996, DTC amended the filing to clarify the 
proposed rule changes.\2\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ Memorandum from Richard B. Nesson, General Counsel, DTC, to 
Christine Sibille, Senior Counsel, Division of Market Regulation, 
Commission (January 31, 1996).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC proposes to implement an Initial Public Offering (``IPO'') 
Tracking System that will allow lead managers (also referred to as 
managing underwriters) and syndicate members \3\ of equity 
underwritings to monitor ``flipping'' \4\ of new issues in an automated 
book-entry environment.

    \3\ Syndiate members are a group of broker-dealers that agree to 
purchase a new issue of securities from an issuer under an 
underwriting agreement. The selling group is a group of broker-
dealers that market the new issue to the public. Selling group 
broker-dealers may purchase from a syndicate member or may be a 
syndicate member.
    \4\ Flipping occurs when a syndicate's lead manager is 
supporting the IPO with a stabilization bid (intended to keep the 
price of the issue from dropping below its initial offering price), 
and securities that had been distributed to investors are resold by 
those investors back to the syndicate. The lead manager may wish to 
identify flipped transactions so that underwriting concessions can 
be recovered from the appropriate syndicate members.
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such 
statements.\5\

    \5\ The Commission has modified the text of the summaries 
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    DTC is proposing to implement its IPO Tracking System to facilitate 
the immobilization of newly underwritten equity securities at the time 
of issuance and to establish the means to effectively track IPOs in a 
book-entry environment.\6\ Currently, many IPOs are distributed 
entirely in physical, certificated form outside the depositories so 
that tracking may be accomplished by using certificate numbers to 
monitor the movements of the securities. This form of tracking is a 
cumbersome and costly process.

    \6\ Under the rules of most national securities exchanges and 
the National Association of Securities Dealers (``NASD''), in order 
to be listed for trading on a national securities exchange or to be 
eligible for inclusion in Nasdaq issuers must represent that the 
CUSIP number identifying the securities 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. 
However, 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 Securities Exchange Act Release No. 35798 
(June 1, 1995), 60 FR 30909. Typically, transactions in depository 
eligible securities between financial intermediaries and between a 
financial intermediary and a customer with delivery versus payment 
privileges must be settled by book entry. Securities Exchange Act 
Release No. 32455 (June 11, 1993), 58 FR 33679.
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    Under DTC's proposed rule change, the lead manager will initiate 
the IPO Tracking System by notifying DTC of its election to track an 
issue by 4:00 p.m. two days prior to the closing date. On the closing 
day of the issue, the underwriting department for the IPO will place 
the outstanding shares in the lead manager's IPO control account at 
DTC.\7\ Allocation of these shares by the lead manager will depend upon 
the nature of the ultimate buyer.

    \7\ To accommodate IPOs which require that a portion of the 
shares be distributed to foreign brokers as syndicate members, the 
initial distribution from the primary lead manager to its second 
participant account (i.e., co-reporting relationship) at DTC or to 
another co-manager's participant account (i.e., co-manager 
relationship) will be identified by the lead manager using a new 
reason code.
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Institutional Trade
    For an institutional customer, the lead manager will move the 
shares from its IPO control account into the selling group broker-
dealers' IPO accounts at DTC via initial distribution deliver orders 
(``DOs''). \8\ The lead manager and selling group may then distribute 
the institutional portion of the initial distribution to agent banks or 
prime brokers \9\ through DTC's Institutional Delivery (``ID'') system 
or by submitting a DO with an Id agent bank identifier.\10\ The DO or 
ID confirm will contain the Agent Internal Account (``AIA'') number and 
the Broker Internal Account (``BIA'') number,\11\ which will be 
captured in order to appropriately populate the IPO database. The 
selling group member's participant number will be stored in the IPO 
database along with the BIA number to fully identify the customer to 
the selling group member.

    \8\ With tracked issues, the lead manager must deliver shares 
directly into the account of the broker-dealer that will either hold 
the shares or transfer the shares to a custodian. All other share 
movements are registered as flips. DTC will not know if a receiving 
broker-dealer is a syndicate member or has purchased shares through 
a syndicate member.
    \9\ A prime broker is a broker-dealer that acts as custodian for 
institutional customers and uses DTC's ID system (acting as an agent 
bank).
    \10\ Alternatively, the lead manager may deliver directly to the 
custodian of the selling group member's institutional clients. This 
process is referred to as directed concessions.
    \11\ The AIA number is the internal number used by the custodian 
(i.e., agent bank or prime broker) to identify the institutional 
client. The BIA number is the internal account number that the 
selling group broker-dealer uses to identify the institutional 
client.
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    Agent banks will not have IPO control accounts; therefore, all 
activity into and out of the agent banks' fee accounts will be 
monitored to keep track of customer purchases and sales. This 
monitoring process will ensure that all customer sales are properly 
reported. When an ID confirm is generated for a sale in a tracked 
issue, DTC will validate the AIA number on the confirm against the AIA 
number in the IPO database. A warning message will be produced on the 
confirmation and on the affirmed confirmation for AIA numbers that do 
not match AIA numbers contained in the IPO database. Similarly, 
settlement authorization or DO processing will be prohibited if a match 
to an AIA number in the IPO database is not found.\12\ In order to 
settle the transaction, the agent bank must either adjust the IPO 
database using the IPO Customer-Level Adjustment function or submit a 
DO with an AIA number that matches the IPO database.

    \12\ As a result, the transaction will be marked as a fail.
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    Unlike agent banks, prime brokers will have IPO control accounts at 
DTC. Upon receipt of an initial distribution transaction, shares will 
be moved to the prime broker's IPO control account, and the IPO 
database will be updated with customer-level detail information from 

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the ID trade information. The IPO Tracking System will automatically 
generate releases of IPO positions to the prime broker's free account 
for affirmed ID trades of secondary market transactions when the AIA 
number on the confirmation matches an AIA number contained in the IPO 
database. It is the release of the IPO position that results in a 
report of a flip.
    When an institutional customer has positions in the same security 
purchased in both an IPO and in the market, the system will use the 
secondary market position to complete a delivery before using shares 
received during the initial distribution. Also, when a customer has 
received shares from multiple broker-dealers and subsequently sells 
such shares, the system will assign the ``flipped'' shares on a 
prorated basis among the selling group members servicing that customer.
Retail Trade
    For a retail distribution, the lead manager will move the 
securities from its IPO control account to the IPO control account of 
the selling group broker-dealer for the retail customer. Broker-dealers 
may populate the IPO database with their own customer-level detail 
information for retail accounts by entering ``Add Customer-Level 
Detail'' transactions directly into the IPO Tracking System or may 
submit daily formatted trade files. Broker-dealers will not be required 
to provide customer level detail. Broker-dealers also may adjust such 
information using the IPO Customer Level Adjustment function.
    Upon the sale of a position that was established in the initial 
distribution, the selling group broker-dealer will release the shares 
from its IPO control account to its free account by using the IPO 
release capability available using DTC's participant terminal system 
(``PTS''), computer-to-computer facilities (``CCF''), or main frame 
dual host (``MDH''). The release instructions will include number of 
shares, trade date, and price. If the broker-dealer has previously 
assigned a customer internal account number to the IPO shares, the 
release instructions must identify such number which must match a 
previously established IPO database entry or the transaction will be 
rejected. Upon DTC's acceptance of the release instructions, the shares 
will move from the broker-dealer's IPO control account to the 
participant's free account. It is this movement that will mark the 
activity as a flip. All deliveries and Continuous Net Settlement 
(``CNS'') short positions will be satisfied from the participant's free 
account.
Correspondent Relationships
    When an introducing broker is acting as a selling group member 
(i.e., it is not a DTC participant), its shares are held by its 
designated clearing agent, which may be a broker-dealer or agent bank. 
When distributing these shares, the lead manager identifies the 
transaction as a correspondent delivery by entering the Correspondent 
Account (``CA'') number on the DO.\13\ The IPO Tracking System will 
capture the CA number from the delivery to the clearing agent. The CA 
number will be stored in the IPO database with the clearing agent's 
participant number to fully identify a correspondent (i.e., the 
introducing broker) as a selling group member. When the ultimate 
purchaser is a retail customer, clearing agents may enter customer-
level details into the IPO database on behalf of correspondents. When 
the ultimate purchaser is an institution, clearing agents will be able 
to use the ID system or a properly identified DO to deliver shares as 
part of the initial distribution to a custodian. Subsequent share 
movements for correspondents, either sales or account transfers, will 
require use of the CA number and will be subject to the same release 
rules that apply to direct DTC participants.

    \13\ The CA number is the clearing firm's internal number for 
the introducing broker.
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Physical Certificates
    DTC will not accept deposits of physical certificates in tracked 
issues. Participants may request a physical certificate through a 
withdrawal-by-transfer (``WT'') request, which will be processed from 
the first settlement day of the issue.\14\ DTC's automated WT system 
will be modified to allow input of the AIA, CA, and ID agent bank 
numbers. If the numbers entered do not match those in the IPO database, 
the WT will be rejected. If a WT request exceeds the position in the 
agent bank's account, the request will be rejected and an error message 
will be generated. For agent banks, the IPO Tracking System will 
process WT requests first using shares which were not part of the 
initial distribution and then shares which were part of the initial 
distribution provided there is sufficient position.

    \14\ A WT is used when participants need to withdraw physical 
stock or registered bond certificates from DTC registered in a name 
other than DTC's nominee name, Cede & Co. DTC permits participants 
to withdraw securities in round lots, odd lots, or mixed lots 
registered in a name designated by the participant.
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    For shares held by broker-dealers, the WT request must contain 
customer level detail information. DTC will process WT requests using 
shares in the IPO control account with a matching customer number. When 
there is a customer number match in the IPO database, DTC will generate 
a release from the IPO account and will report it on the lead manager's 
and selling group member's reports as a WT even if the WT is not 
processed. The released IPO shares will be combined with free account 
shares, and the WT will be processed from the free account. If the 
broker-dealer's IPO control account does not contain shares with a 
matching customer number, the WT will be processed using shares from 
the free account provided there is sufficient position.
Stock Loan
    Participants will be able to process stock loan DOs using stock 
loan reason codes. Participants will not have to enter individual 
account numbers (i.e., AIA numbers) to match the IPO database. For 
brokers, IPO tracked shares do not have to be released by participants 
to execute stock loans because the IPO system will automatically 
release these shares.
Customer Account Transfer
    Customer account transfers must be processed by the new IPO 
customer account transfer function for tracked IPO issues. The function 
allows the deliverer (i.e., the broker-dealer or agent bank) to enter 
the customer internal account number from which the shares are coming, 
its participant number, and customer internal account number to which 
the shares are going. To expedite this process, broker-dealers will be 
notified by NSCC's Automated Customer Account Transfer system that the 
issue is a tracked issue and a trade-for-trade ticket will be produced. 
The transaction can then be entered through the IPO customer account 
transfer function.
Reclamation
    Initial distribution deliveries (i.e., deliveries from the lead 
manager to a selling group member) that are reclaimed and matched will 
return to the account from which they originated (i.e., the IPO control 
account). Reclamations done for shares which were released from a 
selling-group broker-dealer's IPO control account or a prime broker's 
control account to a free account to satisfy an obligation on the 
secondary market will be returned to the delivering participant's free 
account and such shares will still be registered as flipped. When a 
reclamation occurs for an agent bank, the reclaimed DO will be matched 
to the original delivery, and 

[[Page 8994]]
the information on the IPO database will be reversed (i.e., no flip 
will be shown).
Over Subscription
    Generally, when an issue is oversubscribed the lead manager will 
purchase securities in the secondary market. These shares will reside 
in the lead manager's free account. The lead manager will have the 
option of delivering oversubscribed shares from its free account to 
selling group members' IPO control accounts or to its IPO control 
account for its own customers' shares.
Memo Segregation
    DTC will enhance memo segregation processing for IPO tracked issues 
by allowing participants to enter memo segregation instructions with 
share quantities that represent the combined total of their free and 
IPO shares.\15\ As DTC processes DOs, the share quantity of the memo 
segregation instruction will be subtracted from the combined share 
total of the free account and the IPO account and then compared against 
the quantity on the DO to determine if the delivery can take place. The 
shares will be removed from the participant's free account.

    \15\ The memo segregation function (``MSEG'') creates a memo 
position within the participant's free account enabling participants 
to protect customer securities.
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Termination of Tracking
    During the tracking period, the lead manager and selling group 
members will be able to obtain information on the flipping of shares 
through hard copy or machine readable daily reports or through a new 
PTS inquiry function. The lead manager's report combined with market 
conditions will assist the lead manager in determining when to instruct 
DTC to discontinue IPO tracking. DTC will discontinue tracking an IPO 
on the earlier of the business day following DTC's receipt of a 
termination request from the managing underwriting or 120 calendar days 
from the date trading commenced. Once IPO tracking is discontinued, any 
shares remaining in a broker-dealer's IPO control account will be moved 
to its free account.\16\

    \16\ DTC will automatically release the shares from the IPO 
control account to the participant's DTC subaccount segregation 
account at the close of the tracking period when requested in 
writing as a standing instruction by individual participants that 
use the subaccount segregation service. Without this standing 
instruction, DTC will release shares residing in the IPO control 
account directly into the participant's free account at the end of 
the tracking period.
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    At the close of the tracking period the lead manager will receive a 
final report detailing the selling group members (including the 
clearing agents) whose customers have flipped. The report will include 
sale price, trade date, and number of shares as well as the clearing 
agent's participant number and the CA number. The report also will 
show: (1) Outstanding CNS short positions for selling group members 
long in the IPO control account, (2) a total aggregate of all open CNS 
commitments, (3) WT transfers, and (4) outstanding stock loans by agent 
bank or broker-dealer. The lead manager's report will not include 
customer level detail information (i.e., BIA numbers, AIA numbers, or 
customer internal account numbers).
    Selling group members (and lead managers, as part of the syndicate) 
will receive a report of their institutional or retail customers' sale 
transactions.\17\ Such report will include the original BIA number, the 
identity of the prime brokers or agent banks, and the AIA number or for 
retail customer trades, the customer internal account number. This will 
provide sufficient information for selling group members to identify 
the clients that have potentially flipped shares during the tracking 
period.

    \17\ Syndicate members will not see information regarding their 
selling group broker-dealer customers.
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    DTC believes the proposed rule change is consistent with Section 
17A of the Act 18 and the rules thereunder because it will promote the 
immobilization of securities as well as efficiency and safety in the 
clearance and settlement of securities transactions.

    \18\ 15 U.S.C. 78q-1 (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC perceives no impact on competition by reason of the proposed 
rule change.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    In 1991, the U.S. Working Committee of the Group of Thirty \19\ 
established a focus group to examine how settlement of IPOs could be 
processed in a book-entry environment while still providing lead 
managers with the ability to track flipping. Recognizing that no 
tracking system would succeed without support from both broker-dealers 
and agent banks, the focus group established a Flipping Design 
Committee composed of senior people from a diverse group of broker-
dealers and agent banks. Once the design was proposed, a Design 
Implementation Committee composed of broker-dealers and agent banks was 
established to finalize the details of the system. The Design 
Implementation Committee completed its work in December 1994.

    \18\ The Group of Thirty, established in 1978, is an 
international, nonprofit organization charged with broadening the 
understanding of international economic and financial issues, 
exploring the international repercussions of decisions taken in 
public and private sectors, and examining the choices available to 
policymakers. The U.S. Working Committee of the Group of Thirty is 
an organization made up of representatives of broker-dealers, banks 
and financial intermediaries charged with analyzing the existing 
clearance and settlement systems in the U.S. in light of 
recommendations made by the Group of Thirty.
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    The IPO Tracking System has been described in detail in several 
Important Notices to participants. DTC received several comments on the 
proposal and has implemented, or anticipates implementing changes to 
the system as a result of those comments.\20\ The development of the 
IPO Tracking System has been supported by the SIA Clearance and 
Settlement Committee, SOD Regulatory and Clearance Committee, U.S. 
Working Committee of the Group of Thirty, New York Clearing House DTC 
Matters Committee, Bank Depository User Group, and The Cashiers' 
Association of Wall Street, Inc.

    \20\ Specifically, DTC will have the memo segregation processing 
feature in place prior to implementation of the IPO Tracking System.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, Washington, D.C. 20549. Copies 
of the submission, all subsequent amendments, all written statements 
with respect to the proposed rule change that are filed with the 
Commission, and all written communications relating to the 

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proposed rule change between the Commission and any person, other than 
those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of DTC. 
All submissions should refer to File No. SR-DTC-95-27 and should be 
submitted within March 27, 1996.
    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\20\

    \20\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-5155 Filed 3-5-95; 8:45 am]
BILLING CODE 8010-01-M