[Federal Register Volume 66, Number 73 (Monday, April 16, 2001)]
[Notices]
[Pages 19592-19593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9339]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44169; File No. SR-DTC-99-6]


Self-Regulatory Organizations; the Depository Trust Company; 
Order Approving a Proposed Rule Change Relating to the Establishment of 
a Matured Book-Entry Only Certificate Destruction Service

April 10, 2001.
    On October 25, 1999, the Depository Trust Company (``DTC'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change (File No. SR-DTC-99-6) 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 June 15, 2000.\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. 42912 (June 8, 2000), 65 
FR 37585.
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I. Description

    Prior to this rule change, shortly before a debt security held by 
DTC matures, DTC sends to the redemption agent: \3\ (i) A DTC ``letter 
of transmittal;'' (ii) a DTC ``redemption payment summary form;'' and 
(iii) the certificate(s) that represent the maturing issue. This 
procedure is in place for issues that are evidenced both by non-
engraved certificates which are typically book entry only (``BEO'') 
securities \4\ and by engraved certificates. DTC then removes the 
security certificate(s) from its vault and delivers the certificate(s) 
to a commercial courier service that in turn delivers the certificates 
to the redemption agent. There, the certificates are processed in 
accordance with the redemption agent's individual policies and 
practices.\5\
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    \3\ For the majority of maturing debt securities, the transfer 
agent is also the redemption agent. Sometimes the issuer itself will 
serve as the redemption agent or will appoint a third party other 
than the transfer agent to serve as the redemption agent.
    \4\ A BEO security is represented by a paper certificate held in 
a securities depository while all transactions relating to that 
security are completed electronically. Beneficial owners of BEO 
securities generally cannot obtain a paper certificate evidencing 
their ownership interests in BEO securities, and certificates are 
generally not moved outside the depository. This format is widely 
used for many debt securities.
    \5\ Historically, some agents have contracted with commercial 
vendors for the physical destruction of such certificates.
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    Under DTC's rule change, DTC will offer a new optional service to

[[Page 19593]]

redemption agents under which DTC will destroy BEO certificates in lieu 
of shipping the certificates to the redemption agent.\6\ Redemption 
agents that wish to use this new service will deliver to DTC an 
executed ``matured BEO certificate destruction request.'' \7\ DTC will 
continue to present the DTC ``letter of transmittal'' and the DTC 
``redemption payment summary form'' but not the BEO certificate(s) to 
the redemption agent in advance of the issue's maturity. In addition, 
DTC will present to the redemption agent a ``notice of destruction'' 
\8\ stating that DTC intends to destroy the BEO certificate(s) in 
accordance with the procedures set forth in this rule filing as they 
may be amended from time to time. If the redemption agent requests in 
writing in a timely manner that DTC not destroy the certificates, DTC 
will honor the redemption agent's request.
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    \6\ At this time, DTC will offer this service only for non-
engraved BEO certificates.
    \7\ A copy of the ``matured BEO certificate destruction 
request'' is set forth as Exhibit B of DTC's proposed rule change, 
which is available through the Commission's Public Reference Branch 
or through DTC.
    \8\ A copy of the ``notice of destruction'' is set forth in 
Exhibit C of DTC's proposed rule change, which is available through 
the Commission's Public Reference Room or through DTC.
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    The matured BEO security certificates will be physically destroyed 
on DTC's premises only after: (i) DTC has received the redemption 
proceeds in full and (ii) an additional thirty days have passed after 
DTC receives such proceeds. Authorized DTC personnel will oversee and 
witness the destruction of the cancelled certificates. DTC will 
maintain detailed ledger control over the BEO certificates through the 
point of destruction. An accurate record of all canceled certificates 
will be maintained and will be searchable by date of cancellation. 
Prior to destruction, the maturing BEO security certificates will be 
microfilmed or imaged by DTC. DTC will retain the microfilm or computer 
images of these BEO certificates for ten years following destruction of 
the certificates, and for the first six months, DTC will maintain the 
microfilm or computer images in a place that is easily accessible by 
authorized DTC personnel.\9\ Copies of the microfilm (at no fee) or 
eventually images (at a fee) will be available to the redemption agent 
during the ten years following destruction. DTC will be liable for 
gross negligence and willful misconduct.
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    \9\ DTC has informed the Commission's staff that for the time 
period that such microfilm or imaged records must be maintained, 
whether by DTC or by a third party on behalf of DTC, such records 
will: (i) Be available at all times for examination by the 
Commission and the appropriate regulatory agency for immediate, 
easily readable projection/enlargement; (ii) be arranged and indexed 
in a manner that permits immediate location of any particular 
record; (iii) be immediately provided upon request by the Commission 
or appropriate regulatory agency; and (iv) be copied and stored 
separately from the original records.
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    As a result of this new service, such BEO security certificates, 
once deposited in DTC, will never have to be physically removed from 
DTC's vault. They will be maintained in a secure location that does not 
allow access to the public or unauthorized personnel. Additionally, by 
centralizing the destruction of matured BEO debt security certificates, 
DTC will provide uniform and consistent controls and procedures (as 
well as physical safeguards) for all such certificates in the U.S. 
capital market.

II. Discussion

    Section 17A(b)(3)(F)\10\ of the Act requires the rules of a 
clearing agency be designed to assure the safeguarding of securities 
which are in the clearing agency's custody or control or for which it 
is responsible. The Commission believes that DTC's rule change is 
consistent with DTC's obligation under the Act because the new 
procedures will help to reduce the risks currently associated with the 
processing of matured BEO certificates by eliminating much of the 
physical handling currently involved in processing BEO certificates. In 
addition, the Commission believes that DTC's BEO certificate 
destruction policy contains sufficient safeguards concerning the 
selection of BEO certificates that will be destroyed, the oversight of 
the destruction, and the recordkeeping of destroyed BEO certificates.
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    \10\ 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 the 
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-99-6) be, and hereby is, 
approved.

    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. 01-9339 Filed 4-13-01; 8:45 am]
BILLING CODE 8010-01-M