[Federal Register Volume 66, Number 126 (Friday, June 29, 2001)]
[Notices]
[Pages 34728-34729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-16374]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44471; File No. SR-DTC-2001-07]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change Relating to the Movement of 
All DRS Issues into Profile and the Establishment of the ``S'' Position 
as the Default Position

June 22, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 25, 2001, 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 on the proposed rule change from interested parties.
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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 would establish a date on which all 
securities issues which are presently eligible for the Direct 
Registration System (``DRS'') in DTC and which are not in the Profile 
Modification System (``Profile''), which is part of DRS, will have to 
move into Profile. Additionally, a broker-dealer's request for a 
withdrawal by transfer (W.T.) \2\ for a DRS eligible issue which does 
not specifically request a certificate will automatically default to a 
DRS book-entry position (an ``S'' position) on the books of the issuer 
or its transfer agent. Both of these changes would become effective 
November 1, 2001.
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    \2\ W.T. is a service that allows participants to withdraw 
physical stock or registered bond certificates from DTC and have 
them registered in a name other than Cede & Co., DTC's nominee name.
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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 these 
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

    In 1996, the New York Stock Exchange, Inc. modified its listing 
criteria to permit listed companies to issue securities in book entry 
form provided that the issue is eligible for DRS processing \4\ through 
a depository.\5\ Since them, there has been a steady growth in 
securities issued through DRS, primarily through corporate action 
distributions and initial public offerings. An investor may update 
broker-dealer information directly with the respective DRS limited 
participant (i.e., the transfer agent) and also may instruct the DRS 
limited participant to move the investor's share positions to the 
investor's broker-dealer's participant account at DTC by completing the 
appropriate information on the transaction advice and submitting the 
hard copy paper instruction to the DRS limited participant.\6\ In 1999, 
the volume of DRS free deliver order activity moving positions from DRS 
limited participants to participants (i.e., from transfer agents to 
broker-dealers) exceeded 183,000 transactions.\7\ In 2000, the volume 
increased to 280,000 transactions, and through March of 2001, the 
volume was 76,000.
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    \4\ In order for an issue to be eligible for DRS processing 
through DTC, the issue must be ``FAST'' eligible. The issuer or its 
transfer agent must provide direct mail service and have automated 
computer links with DTC.
    \5\ Securities Exchange Act Release No. 37937 (November 8, 
1996), 61 FR 58728 [File No. NYSE 96-29].
    \6\ A DTC participant can establish broker-dealer information on 
behalf of a customer when submitting a W.T. request to establish a 
book entry position in DRS on a limited participant's records.
    \7\ This free deliver order activity is made up of a movement of 
share positions from DRS limited participants to participants free 
of payment.
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    In January 1999, the DRS Committee approved Profile's system 
specifications and authorized DTC to proceed with the development of 
Profile.\8\ DTC completed production of Profile on June 5, 1999, and it 
has been available for use since then. Profile allows a DTC participant 
to submit electronically 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-

[[Page 34729]]

dealer's participant account at DTC (``Electronic Participant 
Instruction'').\9\ Similarly, a DRS limited participant using Profile 
may 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 (``Electronic 
Limited Participant Instruction'').
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    \8\ The DRS Committee is comprised of representatives from the 
Commission, DTC, and the brokerage and transfer agent communities, 
and is responsible for designing DRS.
    \9\ A participants can also use Profile's records to 
electronically append broker-dealer information to a shareholder's 
record at the limited participant.
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    At the time that the Commission approved DTC's proposed rule change 
establishing Profile, it was contemplated that an electronic medallion 
program would be developed by a party that currently administers a 
medallion program in connection with transfers of physical certificates 
and that such an electronic medallion program would become part of 
Profile.\10\ At a meeting held on April 20, 2000, that included 
representatives of the Securities Transfer Association, the Corporate 
Transfer Association, the American Society of Corporate Secretaries, 
the Securities Industry Association, DTC, the staff of the Commission, 
and the New York Stock Exchange, it was decided that because of its 
role in DRS, DTC would be a logical party to administer a program that 
would provide many of the benefits of an electronic medallion 
program.\11\ At that meeting, it was apparent that recipients of 
Electronic Instructions would like to have the benefits of a surety 
bond that would be applicable when the obligor did not honor its 
obligations.
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    \10\ Securities Exchange Act Release No. 42704 (April 19, 2000), 
65 FR 24242.
    \11\ Representatives from the above-referenced organizations 
also sit on the DRS Committee, an industry committee responsible for 
designing DRS.
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    As a result, DTC proposed the DTC Profile Surety Program (``PSP''). 
PSP is open only to DTC full or limited participants. DTC is the 
program administrator of PSP. Under PSP, in order to send an Electronic 
Instruction, an entity is required to procure a surety bond. The surety 
bond has a limit of $2 million per occurrence with an aggregate limit 
of $6 million. The surety company issuing the surety bond must be 
either a company picked by DTC as the administrator of PSP or at the 
election of the entity procuring the surety bond an other surety 
company. Any other such surety company must issue its surety bond 
subject to the terms and conditions established by DTC for the PSP.
    The PSP went into operation on May 3, 2001, with over twenty 
institutions representing 43 participant account numbers. With PSP in 
place, the DRS Committee at a meeting on April 12, 2001 agreed to take 
steps to migrate into Profile all securities issues currently in DRS 
but not in Profile. This migration is scheduled to be completed by 
November 1, 2001.\12\
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    \12\ If a securities issuer whose issue is currently eligible in 
DRS does not agree to allow processing of its securities through 
Profile by November 1, 2001, that issuer will be prohibited from 
establishing any new DRS positions.
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    In addition to the migration into Profile, DTC would change the DRS 
default code for a W.T. from the current ``C'' for certificate to ``S'' 
for statement. The ``S'' default code would be utilized if a broker 
submitted a W.T. for a DRS eligible issue that omitted a ``C'' 
certificate request on behalf of an investor.
    The proposed rule change is consistent with the requirements of 
Section 17A of the Act \13\ and the rules and regulations thereunder 
applicable to DTC because the proposed rule change will give 
participants more efficient usage of DRS and because it 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.
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    \13\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC perceives no adverse 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

    Written comments relating to the proposed rule change have not yet 
been solicited or received. DTC will notify the Commission of any 
written comments received by DTC.

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 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 20549-0609. 
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. 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-2001-07 and should be submitted by July 
20, 2001.

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. 01-16374 Filed 6-28-01; 8:45 am]
BILLING CODE 8010-01-M