[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56279-56280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28169]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40552; SR-DTC-98-16]


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

October 14, 1998
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 19, 1998, 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 from interested persons on the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Under the proposed rule change, DTC will modify its Initial Public 
Offering (``IPO'') tracking system. Specifically, DTC will process 
resales by institutional customers of shares in new issues that are 
being tracked through the IPO tracking system without first determining 
the identity of the syndicate members that distributed the shares being 
resold. In addition, DTC will begin to fill stock loans of shares in 
new issues with shares purchased in the secondary market prior to using 
shares received in the initial distribution.\2\
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    \2\ DTC has prepared written procedures concerning resales by 
institutions and stock loans to implement the proposed rule change. 
The complete text of these procedures is attached as Exhibit 2 to 
DTC's filing, which is available for inspection and copying at the 
Commission's public reference room and through DTC.
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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.\3\
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    \3\ 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

1. Resales of IPO Shares by Institutions
    The IPO tracking system \4\ allows lead managers of new issues to 
monitor ``flipping'' \5\ of shares in new issues that are distributed 
by book-entry through DTC rather than by use of certificates. When a 
lead manager in an IPO notifies DTC of its decision to use the IPO 
tracking system, the system establishes a database of information about 
the customers who purchased the IPO shares (``IPO database''). Before 
DTC processes a resale of IPO shares, the redelivering participant is 
required to provide information about its customer which is then 
compared with the customer detail in the IPO database so that DTC can 
determine and report to the lead manager the identity of the syndicate 
member(s) whose customer has resold IPO shares.
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    \4\ For a detailed description of the IPO tracking system, refer 
to Securities Exchange Act Release No. 37208 (May 13, 1996) (order 
approving proposed rule change).
    \5\ Flipping occurs when a syndicate's lead manager is 
supporting an IPO with a stabilization bid (i.e., the lead manager 
is purchasing shares in the secondary market in order to keep the 
price of the issue from dropping below its initial offering price), 
and shares in the IPO that had been distributed to investors are 
resold by those investors in the secondary market to a syndicate 
member. The lead manager may wish to identify flipped transactions 
so that underwriting concessions (i.e., the discount from the 
offering price received by syndicate members) can be recovered from 
the appropriate syndicate members.
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    When IPO shares are sold by a retail customer, the customer detail 
used is normally provided by the same participant that populated the 
IPO database (i.e., the syndicate member). Therefore, it is unlikely 
for the processing of a resale of IPO shares to be delayed because of a 
failure to match the identity of the reselling customer with any of the 
customers included in the IPO database.
    When the IPO shares are distributed to an institutional customer, 
the syndicate member making the distribution is rarely the same 
participant that acts as an institution's agent for settlement. As a 
result, before DTC will process an institutional customer's resale of 
IPO shares, the IPO tracking system must match customer detail provided 
by the redelivering participant (i.e., the institution's agent) with 
customer detail included in the IPO database by the syndicate member.
    DTC believes that many redeliveries of IPO shares for institutional 
customers during the period from three days prior to closing to three 
days after closing are not being processed efficiently because the 
customer detail provided by the institution's agent does not match any 
customer in the IPO database.\6\ Usually, a mismatch occurs because 
incorrect customer account information (e.g., missing digits or 
transposed characters) was entered into the IPO database and does not 
match the customer account information entered by the reselling 
institution's agent.\7\ A failure to match may also occur when on the 
day an issue closes an institution's agent attempts to redeliver IPO 
shares that were not distributed to its participant account until late 
in the processing day.\8\
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    \6\ Because shares in new issues can be traded on a when-issued 
basis, the IPO tracking system allows participants to enter 
redeliveries of IPO shares as early as three business days prior to 
the date the issue closes and is distributed through the depository.
    \7\ In order for processing of the redelivery to be effected in 
a timely manner, the institution's agent must immediately react to 
the mismatch either by reclaiming the IPO shares to the syndicate 
member that distributed the shares to the institution and requesting 
that the customer account information be corrected or by making 
adjustments to the IPO database itself.
    \8\ Ordinarily, assuming the agent has sufficient position in an 
issue, the redelivery would be effected. However, if an issue is 
being tracked, the redelivery will fail because account information 
relating to its reselling institutional customer is not yet resident 
in the IPO database.
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    Therefore, DTC is proposing to process resales by institutional 
customers of shares in new issues that are being tracked through the 
IPO tracking system without first determining the identity of syndicate 
members that distributed the shares being resold. DTC intends for the

[[Page 56280]]

proposed rule change to eliminate inefficiencies in the IPO tracking 
system that may unnecessarily cause redeliveries of IPO shares to fail. 
DTC believes that even with the proposed modification, a lead manager 
should in most cases be able to determine the identity of the syndicate 
member(s) whose institutional customer has resold IPO shares.\9\
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    \9\ DTC has informed the Commission that the IPO tracking system 
will continue to try to determine the identity of the syndicate 
members whose institutional customer has resold IPO shares.
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2. Stock Loans
    Currently, when a participant that has received a distribution of 
shares in an issue that is being tracked makes a stock loan in that 
issue, the system attempts to fulfill that delivery by first using 
shares received during the initial distribution. DTC then reports these 
transactions to the lead manager. Under the proposed rule change, DTC 
will attempt to satisfy the stock loan by first using the lending 
participant's ``secondary market shares'' (i.e., shares previously 
reported to the lead manager as having been ``flipped'' or shares 
purchased by the participant in the secondary market). As a result, 
stock loan transactions will not be reported to the lead manager to the 
extent that they are processed using secondary market shares. The 
purpose of this proposal is simply to eliminate unnecessary reporting.
    DTC believes that the proposed rule change is consistent with 
Section 17A of the Act \10\ and the rules and regulations thereunder 
because it will eliminate inefficiencies in the system. In addition, 
DTC believes that the availability of the IPO tracking system reduces 
the costs, risks, and delays associated with the physical delivery of 
certificates.
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    \10\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act.

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

    The proposed rule change is supported by the IPO Tracking Industry 
Working Group, an industry group representing underwriters and 
custodian banks that meets monthly with DTC to discuss the operation of 
the IPO tracking system.

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 funds 
such longer period to be appropriate and publishes its reasons for so 
finding or (ii) as to which DTC 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of DTC. All submissions 
should refer to File No. SR-DTC-98-16 and should be submitted by 
November 12, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28169 Filed 10-20-98; 8:45 am]
BILLING CODE 8010-01-M