[Federal Register Volume 63, Number 229 (Monday, November 30, 1998)]
[Notices]
[Pages 65830-65831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31819]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40700; File No. SR-DTC-98-16]


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

November 20, 1998.
    On August 19, 1998, The Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-98-16) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ notice of the proposal 
was published in the Federal Register on October 21, 1998.\2\ No 
comment letters were received. For the reasons discussed below, the 
Commission is approving the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 40552 (October 14, 
1998), 63 FR 56279.
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I. Description

    The rule change modifies DTC's Initial Public Offering (``IPO'') 
tracking system.\3\ Under the rule change, DTC

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will process resales of IPO shares by institutional customers without 
first determining the identity of the syndicate members that 
distributed the shares being resold. In addition, DTC will fill stock 
loans of shares in new issues with shares purchased in the secondary 
market prior to using shares received in the initial distributions.
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    \3\ 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).
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I. Resales of IPO Shares by Institutions

    DTC's IPO tracking system allows lead managers of new issues to 
monitor ``flipping'' of shares in new issues that are distributed 
through DTC by book-entry movement rather than by use of 
certificates.\4\ 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 delivering participant must provide to DTC information about its 
customer. DTC compares the customer information with the customer 
detail in the IPO database. DTC then reports to the lead manager the 
identity of the syndicate member whose customer has resold IPO shares.
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    \4\ 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 
information is normally provided by the same participant that populated 
the IPO database (i.e., the syndicate member). Therefore, the 
processing of a retail customer's resale of IPO shares is usually not 
delayed because of a failure to match the identity of the reselling 
customer with any of the customers included in the IPO database.
    In contrast, when IPO shares are distributed to an institutional 
customer, the syndicate member that makes the distribution is rarely 
the same participant that acts as the institution's agent for 
settlement. According to DTC, many redeliveries of IPO shares for 
institutional customers during the period from three days prior to 
closing to three days after closing are delayed because the customer 
detail provided by the institution's agent does not match any customer 
in the IPO database.\5\ For example, a failure to match can occur if 
the syndicate member enters incorrect customer account information 
(e.g., information with missing digits or transposed characters) into 
the IPO database because that information will not match the customer 
account information entered by the reselling institution's agent. 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. Ordinarily, the redelivery would be effected if the agent had a 
sufficient position in an issue. However, if an issue is being tracked 
by the system, the redelivery will fail because account information 
relating to the reselling institutional customer will not be resident 
in the IPO database.
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    \5\ 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.
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    Therefore, under the rule change DTC will process resales of 
tracked issues by institutional customers without first determining the 
identity of syndicate members that distributed the shares being resold. 
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.

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 the stock loan delivery by first 
using shares received during the initial distribution. DTC then reports 
these transactions to the lead manager. Under the rule change, DTC will 
attempt to satisfy the stock loan by first using the lending 
participant's ``secondary market shares'' (i.e., shares that have 
previously been 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.

II. Discussion

    Section 17A(b)(3)(F) of the Act \6\ requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions. The Commission 
believes that the proposed rule change is consistent with DTC's 
obligations under Section 17A(b)(3)(F) because it should ensure more 
efficient processing of trades through the IPO tracking system. 
Specifically, the rule change should reduce the amount of failed trades 
in IPO shares that result from processing delays in the IPO tracking 
system. In addition, the rule change should reduce the amount of 
processing for loans of IPO shares.
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    \6\ 15 U.S.C. 78q-1(b)(3)(F).
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III. Conclusion

    On the basis of the foregoing, the Commission finds that DTC's 
proposal is consistent with the requirements of the Act and in 
particular with the requirements of Section 17A of the Act 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-DTC-98-16) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31819 Filed 11-27-98; 8:45 am]
BILLING CODE 8010-01-M