[Federal Register Volume 67, Number 151 (Tuesday, August 6, 2002)]
[Notices]
[Pages 50972-50973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19783]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46282; File No. SR-NYSE-2001-33]


Self-Regulatory Organizations; New York Stock Exchange; Order 
Granting Approval of a Proposed Rule Change Relating to Issuing Book-
Entry Securities

July 30, 2002.
    On April 24, 2001, the New York Stock Exchange (``NYSE'') filed 
with the Securities and Exchange Commission (``Commission'') and on 
April 16, 2002, and May 7, 2002, amended proposed rule change SR-NYSE-
2001-33 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 May 28, 2002.\2\ One comment letter in support of the 
proposed rule change was received.\3\ 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. 45970, (May 21, 2000), 
67 FR 102 (May 28, 2002).
    \3\ Letter from C. Michael Viviano, Chairman, Securities 
Industry Association, Operations Committee; Chairman and Chief 
Executive Officer, Bank of New York Clearing Services L.L.C. (June 
4, 2002).
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I. Description

    Over the years the NYSE has accommodated the market's desire to 
immobilize or dematerialize securities by amending its rules to provide 
alternatives to issuing physical certificates. For example, in 1988 the 
NYSE amended Section 501.02 of its Listed Company Manual (``Manual'') 
to allow the issuance of bonds on a book-entry-only basis by using 
global certificates held by a depository.\4\ To further book-entry 
delivery and settlement of trades between brokers, the U.S. markets, 
including NYSE, adopted uniform rules in the 1990s that required 
securities listed on U.S. exchanges and securities associations to be 
depository-eligible \5\ and that required members of exchanges and 
securities associations to settle trades in ``depository-eligible'' 
securities through book-entry movements at registered clearing 
agencies.\6\ In 1996, the NYSE amended section 501.01 of the Manual to 
rescind its policy of requiring issuers to provide certificates to 
record holders with respect to distributions and instead allowed 
issuers to offer shareholders a choice of receiving certificates or 
holding their positions in book-entry form directly with the issuer 
through a direct registration system offered by a depository.\7\
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    \4\ Securities Exchange Act Release No. 25872 (June 30, 1988), 
53 FR 25560 [File No. SR-NYSE-88-07] (order approving permitting the 
use of a single global certificate for bonds).
    \5\ NYSE Rule 227. Securities Exchange Act Release No. 35798 
(June 1, 1995), 60 FR 30909 [File No. SR-NYSE-95-19] (order 
approving adopting of Rule 227 requiring issuers' shares to be 
depository eligible).
    \6\ NYSE Rule 226. Securities Exchange Act Release No. 32455 
(June 11, 1993), 58 FR 33679 [File Nos. SR-AMEX-93-07; SR-BSE-93-08; 
SR-MSE-93-03; SR-NASD-93-11; SR-NYSE-93-13; SR-PSE-93-04; and SR-
PHLX-93-09] (order approving SRO rules requiring book-entry 
settlement of securities transactions).
    \7\ Securities Act Release No. 37937 (November 8, 1996), 61 FR 
58728 [File No. SR-NYSE-96-29] (order approving rule change 
requiring participation in a direct registration system for certain 
stock distributions). Using the direct registration system operated 
by The Depository Trust Company (``DRS''), an investor is able to 
hold a book-entry position on the books of the issuer, to update 
stock ownership information directly with an issuer's transfer 
agent, and to electronically transfer shares between the books of 
the issuer and his or her broker.
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    In recent months, several non-U.S. issuers have approached the NYSE 
expressing an interest in listing their ordinary shares on the NYSE. 
These non-U.S. issuers would prefer or are required by home country law 
to issue in dematerialized format. In order for the NYSE to accommodate 
such non-U.S. issuers' need or preference to dematerialize or 
immobilize their shares, the exchange must amend its Manual.
    Section 501 of the Manual sets out the certification requirements 
for stocks and bonds, including when certificates must be distributed 
and what form stock certificates must take. Section 501.01 of the 
Manual currently does not require a listed company to send stock 
certificates to a record holder unless the record holder requests one 
if (1) the stock distribution relates an issuance pursuant to a stock 
dividend reinvestment plan, stock dividend reinvestment purchase plan, 
or a similar stock purchase plan and (2) regardless of the nature of 
the distribution, the company's stock is included in DRS. Because a 
listed company has to send a record holder a certificate upon request, 
Section 501.01 did not afford the issuer the ability to completely 
dematerialize securities positions or immobilize securities positions 
where certificates would not be available to anyone other than the 
depository.
    The rule change will amend Section 501.01 to allow a listed company 
to issue in a dematerialized or completely immobilized form and 
therefore not send stock certificates to record holders, provided the 
company's stock is issued pursuant to a dividend reinvestment program, 
stock purchase plan, or similar plan or is included in DRS.\8\ The rule 
change will not mandate dematerialization or immobilization but rather 
will allow listed companies the option of issuing traditional stock 
certificates or not. Securities that have traditionally been issued in 
a dematerialized or completely immobilized form, such as bonds and 
derivatives, will continue to be covered by the specific rules 
applicable to them and will not be required to be in DRS.\9\ 
Dematerialized or immobilized equities listed on the NYSE will continue 
to be subject to the requirement of Rules 226 and 227 that the issue 
must be depository eligible and must be settled

[[Page 50973]]

through book-entry movements at registered clearing agencies.
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    \8\ Listed companies incorporated in states that require 
certification may not be able to issue their securities in an 
immobilized or dematerialized format.
    \9\ Sections 501.11 and 703.16 of the Manual respectively.
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    The NYSE believes the rule change recognizes the desirability of 
providing issuers with the efficiencies and safety of not issuing 
certificates while still providing shareholders with the ability to 
hold book-entry securities in their own name through DRS. The NYSE 
notes that the successful expansion of the DRS since its implementation 
in the mid-1990s should readily accommodate non-U.S. companies trading 
ordinary shares in this country.
    The NYSE also believes that in accommodating the immobilization or 
dematerialization of common stock, it is aligning itself with the rules 
and policies of the other U.S. markets. The National Association of 
Securities Dealers Automated Quotations System (``Nasdaq'') does not 
have rules requiring certification or dictating the format of issues 
that are certificated. The American Stock Exchange (``Amex''), which 
had rules similar to the traditional NYSE rules, eliminated all those 
rules as part of a sweeping set of amendments intended to more closely 
align the Amex and the Nasdaq listing requirements following the 
acquisition of the Amex by the National Association of Securities 
Dealers (``NASD'') in 1998. As a result, both the Amex and Nasdaq are 
fully able to accommodate a listing applicant that wishes to immobilize 
or dematerialize their common stock.

II. Discussion

    Section 6(b)(5) of the Act requires that the rules of an exchange 
are designed to remove impediments to and perfect the mechanisms of a 
free and open market and a national market system, and in general, to 
protect investors and the public interest.\10\ For the reasons set 
forth below, the Commission believes that the NYSE's rule change is 
consistent with the exchange's obligations under the Act.
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    \10\ 15 U.S.C. 78(f).
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    In an effort to facilitate a more efficient and secure marketplace, 
including the trading and clearance and settlement of securities 
transactions, the Commission encourages the use of alternatives to 
holding securities in certificated form. The Commission believes that 
use of certificates results in unacceptable delays and expenses in 
processing securities and securities transactions and raises safety 
concerns because of lost, stolen, or forged certificates. The 
difficulty with lost certificates was dramatically demonstrated during 
the September 11, 2001, tragedy when thousand of certificates were 
destroyed in vaults maintained by broker-dealers. Allowing NYSE listed 
companies to issue securities in a dematerialized or immobilized format 
should increase efficiencies and safety in both the trading and 
settling of securities. As a result, industry participants and 
investors should see reduced costs.
    Furthermore, now that DRS is operational, investors have the 
ability to register their securities in their own name on the issuer's 
records and to efficiently transfer using book-entry movements their 
securities positions to their brokers. As the Securities Industry 
Association (``SIA'') noted in their comment letter supporting NYSE's 
rule change, DRS with the Profile System enhancement now provides 
equity securities a similar level of portability as other book-entry 
securities such as treasury securities, municipal bonds, mutual funds, 
and derivatives. Using DRS, an investor can register a position 
directly with the issuer and can electronically move the position to a 
broker of choice for disposition within the current settlement 
timeframes as well as any future shortened settlement cycle.

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 6 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-NYSE-2001-33) 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. 02-19783 Filed 8-5-02; 8:45 am]
BILLING CODE 8010-01-P