[Federal Register Volume 65, Number 51 (Wednesday, March 15, 2000)]
[Notices]
[Pages 14003-14005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6314]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42504; SR-DTC-00-04]


Self-Regulatory Organizations; The Depository Trust Corporation; 
Notice of Filing of Proposed Rule Change Relating to Profile 
Modification Feature of the Direct Registration System

March 8, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 28, 2000, The 
Depository Trust Corporation (``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

    The proposed rule change will establish the Profile Modification 
System (``Profile'') feature of the Direct Registration System 
(``DRS'') facility administered by DTC.\2\ As described more fully 
below, Profile will allow a DTC participant to electronically submit to 
a transfer agent who is a DRS limited participant an investor's 
instruction that its share positions be moved from the investor's DRS 
account with the DRS limited participant to the investor's broker-
dealer's participant account a DTC. Using Profile, a DRS limited 
participant may also submit an investor's instruction for the movement 
of its share position from the investor's broker-dealer's participant 
account at DTC to an account maintained by the DRS limited participant. 
Profile may also be used to append information to DRS limited 
participant's records. Profile will be governed by DTC procedures \3\ 
substantially in the form attached as Exhibits 3 and 4 to DTC's filing. 
The fees connected with Profile are specified below.\4\
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    \2\ For a description of DRS, see Securities Exchange Act 
Release No. 41862 (September 10, 1999), 64 FR 51162 (September 21, 
1999) [File No. SR-DTC-99-16].
    \3\ In addition, DTC understands that certain DRS limited 
participants are developing guidelines relating to their use of DRS. 
Once such guidelines have been approved by the Guidelines 
Subcommittee of the DRS Committee and the DRS Committee, DTC will 
work with the Guidelines Subcommittee to ensure that the guidelines 
are distributed to the appropriate parties. The DRS Committee is an 
industry committee responsible to designing DRS. Its members include 
the Securities Transfer Association, the Securities Industry 
Association, the Corporate Transfer Association, the American 
Society of Corporate Secretaries, and DTC. The staff of the SEC 
attends meetings of the DRS Committee.
    \4\ A copy of DTC's proposed rule change and the attached 
exhibits is available at the Commission's Public Reference Section 
or 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 if 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\
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    \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

    In 1996, the New York Stock Exchange, Inc. (``NYSE'') and the 
National Association of Securities Dealers, Inc. modified their listing 
criteria to permit listed companies to issue securities in book-entry 
using DRS in lieu of certificates (i.e., securities are registered in 
the name of the investor on the books of the issuer but no certificate 
is issued). Since then there has been a steady growth of securities 
issued in DRS, primarily through corporate actions and initial public 
offerings. By completing the appropriate information on the transaction 
advice and submitting the hard copy paper instructions to a DRS limited 
participant, and investor may update broker-dealer information with a 
DRS limited participant and may instruct the DRS limited participant to 
move the investor's share positions to the investor's broker-dealer's 
participant account at DTC. In 1999, the volume of DRS free delivery 
order activity moving positions from DRS limited participants to DTC 
participants exceeded 183,000 transactions. DTC believes that these 
free deliver order transactions are the

[[Page 14004]]

direct result of DRS limited participants processing thousands of hard 
copy transaction advises based on investors' instructions.
    DTC believes that there is substantial evidence to currently 
indicate that the transfer of DRS positions, which is presently a 
multistep, paper-based process, is labor intensive and slow. For an 
investor to move a DRS position from a DRS limited participant to a 
participant, the investors must have its transaction advice (i) 
medallion signature guaranteed and (ii) physically delivered to the DRS 
limited participant. When the transaction advice is received, the DRS 
limited participant enters the information into its system to process 
the instructions. Only after the DRS limited participant completes its 
processing is the investor's DRS position moved to the participant's 
account at DTC. In addition, because the information required to be 
supplied on the transaction advises is not standardized throughout the 
industry, investors (or participants sending the transaction advises on 
behalf of their customers) do not always provide the correct or 
complete information necessary to process the instructions.
    The DRS Committee, the industry committee responsible for designing 
DRS, \6\ has been working through the various legal and processing 
issues to reduce if not eliminate the handling of hard copy transaction 
advises. In January, 1999, the DRS Committee approved Profile's system 
specifications and authorized DTC to proceed with the development of 
Profile. DTC completed production of Profile on June 15, 1999, and it 
has been available for use since then.
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    \6\ Supra note 3.
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    Under the proposed rule change, participants using Profile will 
send standardized information, which, DTC believes, will reduce the 
possibility that the instruction will be rejected due to errors or 
incomplete information. Because Profile is an electronic system that 
eliminates the need for the information to be physically delivered, it 
should make the processing of DRS instructions more efficient and 
should give investors the ability to execute transactions using their 
DRS positions in a time frame that is at least as fast as when using 
certificates. In short, Profile should reduce the time it takes for the 
DRS limited participant to receive and process DRS instructions.
    As proposed, Profile will satisfy all of the hard copy requirements 
listed on the transaction advice and will allow a participant to submit 
the investor's instructions electronically to the DRS limited 
participant via DTC's Participant Terminal System (``PTS'') or via the 
Computer-to-Computer Facility (``CCF''). The required information will 
include the investor's account registration, tax identification number, 
the DRS account number assigned by the DRS limited participant, a CUSIP 
number, and the number of shares to be transferred. The account 
registration and the account number must be entered exactly as they 
appear on the investor's transaction advice or statement. DRS limited 
participants and participants will use the information provided in 
Profile to help ensure that beneficial ownership does not change when 
there is a share movement.
    Profile will accommodate an electronic medallion indemnification if 
such a program is ever established. The electronic medallion numbers 
will be assigned by the administrators of the electronic medallion 
programs. DTC will perform an automated review to ensure that the 
participant is entering its correct electronic medallion number. The 
DRS limited participant, however, will remain responsible for the 
verification of the medallion and it surety limits for each 
transaction.
    The electronic medallion program described in the preceding 
paragraph will not be in effect as part of DRS until such time as the 
NYSE, the Securities Transfer Association Medallion Program 
(``STAMP''), or the Securities Exchange Medallion Program (``SEMP'') 
adopts such a program and the DRS Committee approves the program, and 
the program is in effect. Until that time, a participant submitting a 
Profile instruction to a DRS limited participant must agree to a PTS 
screen indemnity substantially in the following form:
    (1) Participant represents that it has the authority and consent 
for the request appearing on the following screen from either (a) the 
registered owner on the participant's records or (b) a third party who 
has actual authority to act on behalf of the registered owner on the 
participant's records, and that all information shown is accurate and 
complete, except that, with respect to the taxpayer identification 
number included in such information, to the best knowledge of 
participant, such information is accurate and complete; and
    (2) Participant indemnifies the issuer, its transfer agent and 
their respective officers, directors, shareholders, employees, agents, 
representatives, subsidiaries, parents, affiliates, successors and 
assigns against any breach of such representations in connection with 
the transaction that is the subject of such request.
    If an electronic medallion program administered by NYSE, STAMP, or 
SEMP is not in effect or it has not been approved by the DRS Committee, 
references in DTC's procedures will be modified to reflect the 
existence of the screen indemnity rather than an electronic medallion.
    Participants will be able to access Profile via PTS by CUSIP number 
to view the status of all Profile instructions submitted to DRS limited 
participants for processing. DRS limited participants will indicate 
whether a transaction is approved or rejected. Profile will provide an 
aging status of up to thirty business days for all unapproved 
instructions in an effort to avoid duplicate submissions.
    If a participant submits an instruction for the movement of an 
investor's share position and the DRS limited participant approves the 
move, the DRS limited participant will process the instruction through 
the DRS limited participant's Limited Participant Account utilizing the 
DRS deliver order with a designated reason code. Similarly, all 
rejected instructions will have reject reason codes that will indicate 
the reason for the project.
    Under the proposed rule change, a DRS limited participant may also 
submit a Profile instruction requesting the movement of an investor's 
DRS position from the investor's broker-dealer's participant account at 
DTC to a DRS limited participant's Limited Account. If the participant 
approves the move, then a withdrawal by transfer (``WT'') must be 
submitted using the ``S'' indicator for a DRS withdrawal.\7\ This 
withdrawal will move the share position from the participant's account 
at DTC to the DRS limited participant's Limited Participant Account at 
DTC. DTC contemplates that these Profile instructions will be covered 
by an electronic medallion indemnification analogous to the electronic 
medallion program described above.
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    \7\ An ``S'' indicator is a code that instructs the DRS limited 
participant to establish a DRS account for the investor.
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    The electronic medallion program described in the preceding 
paragraph will not be in effect as part of DRS until such time as the 
NYSE, STAMP, or SEMP adopts such a program, the DRS Committee approves 
the program, and the program is in effect. Until that time, a DRS 
limited participant submitting a Profile instruction to a participant 
will agree to a PTS screen indemnity substantially in the following 
form:

[[Page 14005]]

    (1) Transfer agent represents that it has the authority and consent 
for the request appearing on the following screen from either (a) the 
registered owner on the transfer agent's records or (b) a third party 
who has actual authority to act on behalf of the registered owner on 
the transfer agent's records, and that all information shown is 
accurate and complete, except that, with respect to the taxpayer 
identification number included in such information, to the best 
knowledge of transfer agent, such information is accurate and complete; 
and
    (2) Transfer agent indemnifies the participant and its respective 
officers, directors, shareholders, employees, agents, representatives, 
subsidiaries, parents, affiliates, successors and assigns against any 
breach of such representations in connection with the transaction that 
is the subject of such request.
    If the electronic medallion program administered by NYSE, STAMP, or 
SEMP is not in effect or it has not been approved by the DRS Committee, 
references in DTC's procedures will be modified to reflect the 
existence of the screen indemnity rather than an electronic medallion.
    DTC proposes to charge participants a fee of 31 cents for each 
instruction submitted through Profile initiating a DRS share movement 
or appending information to an investor's DRS account, and charge the 
DRS limited participant receiving the instruction a fee of 9 cents for 
that transactions.\8\ DTC also proposes to charge DRS limited 
participants a fee of 40 cents for each instruction submitted through 
Profile initiating a DRS share movement.\9\
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    \8\ The STA representatives on the DRS Committee requested that 
DTC develop CCF capability in DRS for transfer agents. The DRS 
Committee approved the 9 cent fee to reimburse DTC for the cost of 
systems development to accommodate the STA request.
    \9\ In this type of transaction, there is no CCF development 
fee, as no CCF development was requested. Participants bear a fee 
for WT instructions when a share position is moved to a DRS limited 
participant's Limited Participant Account.
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    The proposed rule change is consistent with the requirements of 
Section 17A of the Act and the rules and regulations thereunder 
applicable to DTC since the proposed rule change will provide 
participants more efficient use of DRS. The proposed rule change will 
be implemented consistently with the safeguarding of securities and 
funds in DTC's custody or control or for which it is responsible since 
the operation of DRS, as modified by the proposed rule change, will be 
similar to the current operation of the function.

(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

    The proposed rule change has been developed through discussions 
with several participants and DRS limited participants. Written 
comments from participants or others have not been solicited or 
received on the proposed rule change.

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 the 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 20549-0609. 
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. section 553, 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 offices of DTC. All submissions 
should refer to File No. SR-DTC-99-04 and should be submitted by April 
5, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-6314 Filed 3-14-00; 8:45 am]
BILLING CODE 8010-01-M