[Federal Register Volume 66, Number 162 (Tuesday, August 21, 2001)]
[Notices]
[Pages 43939-43941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-20976]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44696; File No. SR-DTC-2001-07]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change Relating to the 
Movement of All DRS Issues Into Profile and the Establishment of the 
``S'' Position as the Default Position

August 14, 2001.
    On May 25, 2001, The Depository Trust Company (``DTC'') filed with 
the

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Securities and Exchange Commission (``Commission'') a proposed rule 
change (File No. SR-DTC-2001-07) 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 29, 2001.\2\ 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 Release No. 44471, (June 22, 2001), 66 
FR 34728.
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I. Description

    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 included in the Direct Registration 
System (``DRS'').\3\ Since then, there has been a steady growth in 
securities issued through DRS, primarily through corporate action 
distributions and initial public offerings.
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    \3\ Securities Exchange Act Release No. 37937 (November 8, 
1996), 61 FR 58728 [File No. NYSE 96-29]. Similarly, the National 
Association of Securities Dealers modified its rule to require that 
if an issuer establishes a direct registration program, it must 
participate in an electronic link with a securities depository in 
order to facilitate the electronic transfer of the issue. Securities 
Exchange Act Release No. 39369, (November 26, 1997), 62 FR 64034 
[File No. SR-NASD-97-51].
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    In January 1999, the DRS Committee \4\ approved system 
specifications for the Profile Modification System (``Profile'') and 
authorized DTC to proceed with the development of Profile.\5\ DTC 
completed production of Profile on June 15, 1999, and it has been 
available for use since then. Profile allows a DTC participant (i.e., a 
broker-dealer) to submit electronically to a transfer agent who is a 
``DRS limited participant'' at DTC an investor's instruction that the 
investor's share positions be moved from the investor's DRS account 
with the limited participant to the investor's broker-dealer's 
participant account at DTC (``Electronic Participant Instruction'').\6\ 
Similarly, a DRS limited participant using Profile may submit an 
investor's instruction for the movement of the investor's share 
positions from the investor's broker-dealer's participant account at 
DTC to the investor's DRS account with the DRS limited participant 
(``Electronic Limited Participant Instruction'').
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    \4\ The DRS Committee is comprised of representatives from DTC 
and the brokerage and transfer agent communities and is responsible 
for designing DRS.
    \5\ For a description of Profile, refer to Securities Exchange 
Act Release No. 41862 (September 10, 1999), 64 FR 51162 (order 
approving implementation of Profile).
    \6\ A broker-dealer can also use Profile to electronically add 
or update broker-dealer information to a shareholder's record at the 
transfer agent.
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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.\7\ 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, 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.
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    \7\ Securities Exchange Act Release No. 42704 (April 19, 2000), 
65 FR 24242 [File No. SR-DTC-00-04].
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    As a result, DTC proposed and the Commission approved the DTC 
Profile Surety Program (``PSP'').\8\ PSP is open only to DTC 
participants or DTC DRS limited participants. DTC is the program 
administrator of PSP. Under PSP, in order to be able to send an 
Electronic Instruction, an entity is required to have a surety bond 
issued by either the surety bond company picked by DTC as the 
administrator of PSP or another surety company. Any surety bond issued 
by another surety bond company must have the same terms and conditions 
established by DTC for the PSP. For example, each surety bond must have 
a limit of $2 million per occurrence with an aggregate limit of $6 
million. The PSP went into operation on May 3, 2001, and currently 35 
broker-dealers and transfer agents have joined the program.
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    \8\ Securities Exchange Act Release No. 43586 (November 17, 
2000), 65 FR 70745 [File No. SR-DTC-00-09] (order approving PSP).
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    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. As a result, DTC filed this 
rule filing which requires that all security issues which are presently 
DRS eligible but which are not eligible for processing in Profile must 
be made eligible for processing in Profile by November 1, 2001.\9\ Also 
beginning on November 1, 2001, a broker-dealer's request for a 
withdrawal by transfer (W.T.) \10\ for a DRS eligible issue which does 
not specifically request a certificate will automatically default to a 
request for a DRS book-entry position (an ``S'' position) on the books 
of the issuer or its transfer agent.
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    \9\ 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.
    \10\ 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. Discussion

    Section 17A(b)(3)(F) \11\ of the Act requires that the rules of a 
clearing agency be designed to promote the prompt and accurate 
clearance and settlement of securities transactions.\12\ For the 
reasons set forth below, the Commission believes that DTC's proposed 
rule change is consistent with DTC's obligations under Section 
17A(b)(3)(F) of the Act.
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
    \12\ The prompt and accurate clearance and settlement of 
securities transactions includes the transfer of record ownership of 
securities. 15 U.S.C. 78q-1(a)(1)(A).
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    As the Commission has stated in previous orders concerning DRS, the 
primary purpose of Profile is to provide a more prompt and accurate 
mechanism for the transfer of an investor's book-entry position between 
the investor's broker-dealer and the transfer agent for the issue than 
the multistep, paper-based processing that is used when Profile is not 
used. The migration of all DRS issues into Profile processing, with the 
attendant PSP, should ensure that all investors holding securities 
positions in DRS will be able to transfer their shares back and forth 
between their broker-dealers and the transfer agents for the issuers in 
a prompt and accurate manner.
    In addition, the establishment of ``S'' position as DTC's W.T. 
default should increase the number of investors who are able to more 
efficiently move their securities through DRS by reducing the number of 
instances when an investor receives a certificate not because the 
investor requested a certificate but because the investor's broker-
dealer fails to elect either a certificate or a DRS position on its 
W.T. request.
    As set forth above, the Commission finds that DTC's rule change (1) 
mandating that all DRS issues must be able to be processed through 
Profile and (2) establishing the ``S'' position as DTC's W.T. default 
position is consistent with Section 17A(b)(3)(F) of the Act because it 
should facilitate the more efficient transfer of investors' security 
positions and thereby should promote the prompt and accurate

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clearance and settlement of securities transactions.

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-2001-07) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-20976 Filed 8-20-01; 8:45 am]
BILLING CODE 8010-01-M