[Federal Register Volume 65, Number 168 (Tuesday, August 29, 2000)]
[Notices]
[Pages 52459-52460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22019]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43197; File No. SR-DTC-00-2]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change Relating to the 
Issuance of Preferred Stock

August 23, 2000.
    On February 2, 2000, the Depository Trust company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-00-02) pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'').\1\ On February 3, 2000, DTC 
filed an amendment to the proposed rule change. Notice of the proposal 
was published in the Federal Register on April 4, 2000.\2\ On April 18, 
2000, DTC filed a second amendment to the proposed rule change.\3\ No 
comment letters were received. For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 42578, (March 27, 2000), 
65 FR 17688.
    \3\ The April 18, 2000 amendment to the proposed rule filing was 
technical in nature and did not require republication of the notice.
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I. Description

    In March 1999, DTC amended its organization certificate to provide 
for up to $150 million of preferred stock as thereafter authorized by 
the Board of Directors.\4\ Under the rule change, DTC will issue $75 
million of series A preferred stock and will reduce the mandatory 
deposits to the participants fund by a like amount.\5\
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    \4\ Securities Exchange Act Release No. 41529 (June 15, 1999), 
64 FR 33333.
    \5\ In connection with this proposed rule change, the Commission 
advised DTC that it will take no action with respect to DTC broker-
dealer participants treating investments in DTC series A preferred 
stock as allowable assets for purposes of Rule 15c3-1 promulgated 
under Section 15(c)(3) of the Act. Letter from Michael A. 
Macchiaroli, Associate Director, Division of Market Regulation, 
Commission, to Richard B. Nesson, Executive Vice President and 
General Counsel, DTC, (August 21, 2000).
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    The issuance of the $75 million of series A preferred stock, the 
corresponding reduction of mandatory participants fund deposits, and 
the transition to the new arrangements will be governed by the 
following documents.\6\
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    \6\ A copy of DTC's proposed rule change and the attached 
exhibits, including the Certificate of Amendment of the Organization 
Certificate, the revised DTC Rules, and the Transition Procedures, 
are available at the Commission's Public Reference Section or 
through DTC.
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    (1) Certificate of Amendment of the Certificate of Incorporation. 
The certificate of amendment sets forth the relative rights (including 
a dividend which will provide an after-tax return comparable to the 
after-tax return on participant fund deposits), preferences, and 
limitations of the series A preferred stock.
    (2) Revised DTC Rules. The revised rules set forth:
    (a) the requirement that participants purchase and own shares of 
series A preferred stock; \7\
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    \7\ DTC Rule 4, Section 2.
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    (b) the amount of series A preferred stock that participants are 
required to purchase and own, the manner in which that amount is to be 
periodically adjusted, the price at which shares of series A preferred 
stock are to be transferred among participants, the method and timing 
of payment for shares of series A preferred stock, and certain 
limitations on the transfer of shares of series A preferred stock; \8\
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    \8\ Id.
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    (c) the right of DTC, acting as agent and attorney-in-fact for its 
participants, to pledge participants' shares of series A preferred 
stock to DTC's end-of-day lenders; \9\
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    \9\ DTC Rule 4, Section 2(f).
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    (d) the right of DTC, acting as agent and attorney-in-fact for its 
participants, to sell any participant's shares of series A preferred 
stock to other participants (which have a corresponding obligation to 
purchase such shares) and to apply the proceeds to the participant's 
obligations to DTC; \10\
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    \10\ DTC Rule 4, Section 2(f).
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    (e) various new and amended defined terms such as ``preferred 
stock,'' ``required preferred stock investment,'' ``actual preferred 
stock investment,'' and ``aggregate required deposit and investment''; 
\11\
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    \11\ DTC Rule 1.
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    (f) the structure under which DTC, acting as agent and attorney-in-
fact for a party that has ceased to be a participant, shall sell all of 
the shares of series A preferred stock of the former participant to 
current participants (who shall be required to purchase such shares pro 
rata to their required preferred stock investments at the time

[[Page 52460]]

of such purchase) and shall add the proceeds thereof to the 
participants fund deposit of the former participant for disposition in 
accordance with DTC Rules; \12\ and
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    \12\ DTC Rule 4, Section 2(h); DTC Rule 4, Section 1(h) provides 
for the return of the participants fund deposit to a party ceasing 
to be a participant.
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    (g) certain other conforming and minor stylistic changes.
    (3) Transition Procedure. The transition procedure sets forth the 
time and manner in which, without any action required on the part of 
participants (other than the consent deemed to be given to DTC by 
virtue of their receipt of all necessary information and their 
continued use of the services and facilities of DTC), the required 
deposits of existing participants to the participants fund will be 
reduced in the aggregate amount of $75 million and the $75 million will 
be used by existing participants to purchases from DTC the series A 
preferred stock.

II. Discussion

    Section 17A(b)(3)(F) \13\ of the Act requires that the rules of a 
clearing agency be designed to assure the safeguarding of securities 
and funds which are in the custody or control of the clearing agency or 
for which it is responsible. For the reasons set forth below, the 
Commission finds that DTC's proposed rule change is consistent with 
DTC's obligations under the Act.
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    \13\ 15 U.S.C. 78q-1(b)(3)(F).
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    The new series A preferred stock will be used in conjunction with 
and will have the characteristics of required deposits to DTC's 
participants fund. DTC and its participants' rights and obligations 
with respect to investments in series A preferred stock will be very 
similar to their rights and obligations with respect to participants' 
fund deposits. The rule change enables DTC to increase its capital base 
and maintain the same level of assets for use in the event of a 
participation default without imposing any additional financial burden 
on its participants. Therefore, the Commission finds that the rule 
change is consistent with DTC's obligation to assure the safeguarding 
of securities and funds which are in the custody or control of the 
clearing agency or for which it is responsible.

III. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular 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-00-02) be and hereby is 
approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22019 Filed 8-28-00; 8:45 am]
BILLING CODE 8010-01-M