[Federal Register Volume 61, Number 197 (Wednesday, October 9, 1996)]
[Notices]
[Pages 52985-52988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25923]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37778; File No. SR-DTC-96-15


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change Relating to the Procedures To 
Establish a Direct Registration System

October 3, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 17, 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. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change will establish (1) a new service called 
the Direct Registration System (``DRS''), which was developed by the 
securities industry, and (2) a new category of participants whose use 
of DTC's services will be limited to DRS.

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.\2\
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    \2\ The commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The proposed rule change will amend DTC's rules (1) to establish a 
new category of participant called a limited participant which would be 
authorized to use only certain services of the depository; (2) to 
describe the DRS service to be offered by DTC; and (3) to set forth the 
requirements for (a) the admission of limited participants authorized 
to use only the DRS service and (b) the eligibility of securities for 
the DRS service. DRS will permit an investor to hold a security 
directly in electronic form as the registered owner of the security on 
the books of the issuer rather than (1) indirectly through a financial 
intermediary that holds the security in street name or in an account 
with a depository or (2) in the form of a certificate. The investor 
will have the right to transfer its DRS position in the security to a 
financial intermediary in order to sell or pledge the security or to 
receive a certificate representing the security.\3\
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    \3\ For a complete description of DRS, refer to Securities 
Exchange Act Release No. 35038 (December 1, 1994), 59 FR 63652 
(concept release on a transfer agent operated book-entry 
registration system).
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    To facilitate the transfer of a DRS position to a financial 
intermediary, DTC will offer a new service to transfer agent, bank, and 
broker-dealer participants of DTC. A transfer agent that participates 
in the Fast Automated Transfer (``FAST'') program at DTC and meets the 
other qualifications described below will be able to become a DRS 
limited participant. Using the DRS service, an investor's DRS position 
could be transferred by the DRS limited participant (i.e., the transfer 
agent) to the financial intermediary acting for the investor (i.e., a 
bank or broker-dealer participant) through the facilities of DTC. 
Specifically, the limited participant will credit its DTC FAST account 
with the amount of the security to be transferred, and DTC in turn will 
credit the account of the receiving participant with that amount of the 
security.\4\
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    \4\ A complete description of the DRS service may be found in 
the Important Notices issued by DTC on the implementation of a DRS, 
which are attached as Exhibit A and Exhibit B. Important Notice B# 
1368-96 (July 15, 1996) and Important Notice B# 1505-96 (July 26, 
1996).
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    To qualify for admission as a limited participant for DRS services, 
an applicant must be a partnership, corporation, or other organization 
or entity that (1) is registered as a transfer agent pursuant to 
Section 17A(c) of the of the Act and Rule 17Ac2-1 thereunder, (2) 
participates in the FAST program, (3) provides Direct Mail Service on 
transfers, (4) accepts dividend reinvestment instructions from DTC on 
DRS eligible securities that offer dividend reinvestment plans, (5) 
communicates with DTC using DTC computer-to-computer (``CCF'') 
platforms, and (6) executes an accountholder agreement.\5\ To qualify 
as an eligible security for processing

[[Page 52986]]

through the DRS service, a security must be eligible for the FAST 
program.
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    \5\ Under the accountholder agreement, the transfer agent, among 
other things, agrees to continue to meet the admission criteria, pay 
all applicable fees, and indemnify DTC for any expense caused by the 
limited participant's act or omission.
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    A DRS limited participant will be charged the following fees:

1. Limited Participant Accountholder fee--$225 per month
2. Deliver Order transaction processing fee--$.45 per transaction

    DTC participants receiving such a DRS delivery will also be charged 
$.45 per transaction. In addition, when a DTC participant instructs a 
transfer agent to establish a DRS account for a shareholder and the 
transfer agent subsequently mails a transaction advice to the 
shareholder confirming that such an account has been established at the 
transfer agent, the transfer agent's fee of $.55 for mailing and 
handling the DRS transaction advice will be charged back to the 
participant directly by DTC. DTC will collect the advice fees and will 
periodically remit such fees to the transfer agent.
    The proposed rule change is consistent with the Congressional 
objectives in Section 17A(a)(1) of the Act \6\ in that it promotes 
efficiencies in the prompt and accurate clearance and settlement of 
securities transactions. DRS will enhance the availability of 
securities for settlement in a three business day settlement (``T+3'') 
environment. Individual investors electing book-entry positions on the 
books of the issuers (i.e., DRS positions) will be able to subsequently 
arrange to have such positions transferred electronically to banks or 
broker-dealers in connection with sales or other dispositions of the 
securities. By effecting transfers through automated linkages between 
transfer agents and DTC, the DRS service to be offered by DTC will 
promote efficiencies in the clearance and settlement system. Moreover, 
DRS will foster cooperation and coordination between DTC and other 
entities engaged in the clearance and settlement of securities 
transactions.
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    \6\ 15 U.S.C. section 78q-1(a)(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

    Although DTC did not solicit comments on DRS, over the last two 
years, a joint committee of representatives of the Securities Transfer 
Association, the Securities Industry Association, the Corporate 
Transfer Agents Association, and the depositories has met and agreed on 
the features of DRS.

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, N.W., 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 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 in Washington, D.C. Copies of such 
filing will also be available for inspection and copying at the 
principal office of DTC. All submissions should refer to the file 
number SR-DTC-96-15 and should be submitted by October 30, 1996.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.

Exhibit A--The Depository Trust Company

Important Notice

July 15, 1996.
B #: 1368-96
TO: All Participants
ATTENTION: Managing Partner/Officer, Cashier, Transfer Manager
SUBJECT: Implementation of a Direct Registration system

Background

    In 1994, the Securities and Exchange Commission requested that 
the Industry work to develop a ``Direct Registration System'' (DRS) 
process, in order to provide investors with additional approaches to 
holding their securities in certificateless form. Under DRS, 
Investors electing to have their ownership of securities registered 
on the issuer's records would be offered a choice between a 
registered certificate and a book-entry or ``direct registration'' 
position recorded on the books of the issuer's transfer agent. An 
investor electing a book-entry or DRS position would receive a 
``transaction advice'' reporting creation of the position, as well 
as periodic account statements evidencing it. The investor would be 
able subsequently to arrange to have the DRS position transferred 
electronically to a bank or broker-dealer in connection with a sale 
or other disposition of the securities.
    Over the last two years a joint committee of representatives of 
the Securities Transfer Association, Securities Industry 
Association, and the Corporate Transfer Agents Association has met 
and agreed on the features of a Direct Registration system. As a 
result of those discussions, it is anticipated that the DRS 
alternative will be offered to investors on an initial group of 
``pilot'' issues some time late in 1996 (most probably in November). 
Highlights of the proposed system follow.

Overview

Eligibility

    Because of the degree of systems sophistication required, the 
joint committee agreed that only issues that are eligible under 
DTC's Fast Automated Securities Transfer (FAST) Program should be 
eligible for DRS. The Joint committee also agreed that if the issue 
offers a dividend reinvestment plan (DRP) the plan must be open to 
DTC participation.
    FAST eligibility and DRP availability have been recommended by 
the Committee to the SEC as criteria for an Issuer's DRS program.
    When an issue becomes eligible for DRS, Participants will be 
notified by Important Notice, and a DRS Indicator will be added to 
the Eligible Corporate Securities File (ELISC and ELISCD).

Transfers

    Any Withdrawal-by-Transfer (WT) request made via the Participant 
Terminal System (PTS) using functions NWTI or RWTI or Computer-to-
Computer (CCF/CCFII) will be modified to include the following: DRS 
indicator, Participant account number, and Participant or 
correspondent broker name. The Participant should include in the 
``DRS indicator'' field the appropriate code indicating whether the 
transferee wants a certificate issued or a DRS position established 
(instructions with this field left blank will be rejected). The 
``account number'' specified should be transferee's account number 
at the Participant or correspondent broker (so that the DRS agent 
can include this information on its records to associate the 
investor's DRS position with the submitting Participant or its 
correspondent).
    When a Participant's customer requests that a DRS position be 
established, the DRS

[[Page 52987]]

transaction advice will be mailed directly by the agent to the 
customer. The transfer agent's fee of 55 cents for mailing and 
handling the DRS transaction advice will be charged back to the 
participant directly by DTC, similar to the Direct Mail process. No 
DRS transaction advice will be mailed or forwarded to the 
Participant directly by DTC. However, DTC will receive an automated 
confirmation from the transfer agent that the DRS transaction advice 
has been processed and mailed and will notify the Participant.

Investor-Directed Sale

    An Investor who has elected a DRS position instead of a physical 
certificate will be registered directly on the transfer agent's 
books. Under this option, if the investor subsequently sells the 
securities through a bank or broker-dealer, the investor would 
contact the agent to direct the movement of the DRS position to the 
investor's bank or broker-dealer. Upon receipt of this instruction, 
the agent will increase the depository position on its records and 
credit its agent account at DTC established for this purpose. The 
agent will also provide to DTC instructions to move the position by 
a book-entry delivery directly to the investor's bank or broker-
dealer account at DTC. Systems modifications are now being made to 
identify these transactions as DRS deliver orders. New reason codes 
will be established for these transactions, and Participants will be 
notified when this is completed.

Action Required by Participants

    DTC has recently conducted two forums with Participants, 
transfer agents, and service providers to discuss draft systems 
specifications for all components of DRS. Final specifications, 
along with a CCF user guide, are scheduled for distribution in mid-
August. Participants are urged to plan for the implementation of 
these system modifications as a DRS pilot is expected to begin 
November 1996 with a gradual increase in the number of DRS-eligible 
issues by the end of the first quarter of 1997.
    Please direct your questions to Al DeMalo, Director of 
Operations, at (212) 898-3171, Ronald Burns, Vice President of 
Operations, at (516) 227-4004, or your Participant Services 
representative.
Ronald J. Burns,
Vice President, Operations.

Exhibit B--The Depository Trust Company, Corporate Trust Services

Important Notice

July 26, 1996.
B#: 1505-96
TO: Transfer Agents and Issuers
SUBJECT: Implementation of a Direct Registration System

Background

    In 1994, the Securities and Exchange Commission requested that 
the industry work to develop a ``Direct Registration System'' (DRS) 
process, in order to provide investors with additional approaches to 
holding their securities in certificateless form. Under DRS, 
investors electing to have their ownership of securities registered 
on the issuer's records would be offered a choice between a 
registered certificate and a book-entry or ``direct registration'' 
position recorded on the books of the issuer's transfer agent. An 
investor electing a book-entry or DRS position would receive a 
``transaction advice'' reporting creation of the position, as well 
as periodic account statements evidencing it. The investor would be 
able subsequently to arrange to have the DRS position transferred 
electronically to a bank or broker-dealer in connection with a sale 
or other disposition of the securities.
    Over the last two years a joint committee of representatives of 
the Securities Transfer Association, the Securities Industry 
Association, and the Corporate Transfer Agents Association has met 
and agreed on the features of a Direct Registration System. As a 
result of those discussions, it is anticipated that the DRS 
alternative will be offered to investors on an initial group of 
``pilot'' issues some time late in 1996 (most probably in November). 
Highlights of the proposed system follow.

Overview

Participation

    The joint committee agreed that a transfer agent or issuer 
wishing to offer a DRS program to investors will need to establish a 
DRS Limited Participant account at DTC in order that it may from 
time to time effect a book entry transfer of securities held in the 
form of a DRS position (e.g., in connection with an investor sale of 
a DRS position through a depository Participant). A party wishing to 
open a Limited Participant account must (1) be registered as a 
transfer agent with the Securities and Exchange Commission, (2) 
participate as a transfer agent in DTC's Fast Automated Securities 
Transfer (FAST) program, (3) provide Direct Mail Service on 
transfers, (4) accept dividend reinvestment instructions from DTC on 
DRS program issues which offer dividend reinvestment, and (5) 
communicate with DTC through a computer-to-computer interface using 
DTC's CCF platforms. Certain of these requirements relate to the 
standards for an issue's DRS eligibility (as described below).
    To establish a DRS Limited Participant account, please contact 
your Corporate Trust Services Agent Liaison.

Issue Eligibility

    The joint committee agreed that only issues that are eligible 
under DTC's Fast program can be eligible for DRS. The joint 
committee also agreed that if the issue offers a dividend 
reinvestment plan (DRP), the plan must be open to DTC participation. 
FAST eligibility and DRP availability have been recommended by the 
committee to the SEC as criteria for an issuer's DRS program.
    DRS agents and issuers must provide standard 30 to 60 day prior 
notification to DTC when planning to introduce DRS issues. Once an 
issue becomes eligible for DRS, Participants and Limited 
Participants will be notified by Important Notice, and a DRS 
indicator will be added to the Eligible Corporate Securities File. 
Parties wishing to make issues DRS eligible should contact DTC's 
Transfer Agent Services Department.

Process Overview

Transfers/Buys

    As agreed by the joint committee, all automated Withdrawal-by-
Transfer (WT) requests made by DTC Participants on DRS issues will 
be modified to include the following: DRS indicator, Participant 
account number, and Participant or correspondent broker name. A DTC 
Participant submitting a WT on a DRS-eligible issue will include in 
the ``DRS indicator'' field the appropriate code indicating whether 
the transferee wants a certificate issued or a DRS position 
established. The ``account number'' specified will be the 
transferee's account number at the submitting Participant or 
correspondent broker (so that the DRS agent or issuer can include 
this information on its records to associate the investor's DRS 
position with the submitting Participant or its correspondent), as 
the joint committee agreed should be done.

Transfer Advice/Notifications

    When a customer requests that a DRS position be established, the 
DRS transaction advice should be mailed directly by the DRS agent or 
issuer to the customer. Upon instruction by the DRS agent or issuer, 
a fee (not to exceed 55 cents) for mailing and handling the DRS 
transaction advice will be charged back to the DTC Participant 
directly by DTC, similar to the Direct Mail Centralized Billing 
process, and remitted, upon collection, to the DRS agent or issuer. 
DTC will not accept from DRS agents or issuers, nor mail to its 
Participants, any DRS transaction advices. However, DTC should 
receive an electronic confirmation from the DRS agent or issuer that 
the DRS transaction advice has been processed and mailed and DTC, in 
turn, will notify the Participant that the transaction was 
completed.
    Direct-Mail return transmissions (DMAX/CF2DMX) will enable the 
DRS agent or issuer to inform DTC of the certificates issued and 
mailed in accordance with the Direct Mail indicator received as part 
of the WT transmission.

Investor-Directed Sale

    An investor who has elected a DRS position instead of a physical 
certificate will be registered directly on the DRS agent's or 
issuer's books. Under this option, if the investor subsequently 
sells the securities through a bank or broker-dealer, the investor 
would contact the DRS agent or issuer to direct the movement of the 
DRS position to the investor's bank or broker-dealer. Upon receipt 
of this instruction, the DRS agent or issuer will increase the 
depository FAST position on its records and credit its Limited 
Participant account at DTC established for this purpose. The DRS 
agent or issuer will also provide to DTC instructions to move the 
position by a book-entry delivery from its DRS Limited Participant 
account directly to the investor's bank or broker-dealer account at 
DTC. Systems modifications are now being made to identify these 
transactions as DRS deliver orders. New reason codes will be 
established for these transactions, and all parties will be notified 
when this is completed.

[[Page 52988]]

Next Steps

    DTC has recently conducted two forums with transfer agents, 
issuers, Participants, and service providers to discuss draft 
systems specifications for all components of DRS. Final 
specifications will be distributed shortly. All interested parties 
are urged to plan for the implementation of these system 
modifications as a DRS pilot is expected to begin November 1996 with 
a gradual increase in the number of DRS eligible issues by the end 
of the first quarter of 1997.
    For your convenience, please direct your questions to the 
Corporate Trust Services staff listed on the attached schedule.
Ann Vece,
Group Director, Corporate Trust Services.
[FR Doc. 96-25923 Filed 10-8-96; 8:45 am]
BILLING CODE 8010-01-M