[Federal Register Volume 68, Number 246 (Tuesday, December 23, 2003)]
[Rules and Regulations]
[Pages 74390-74402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31450]



[[Page 74389]]

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Part IV





Securities and Exchange Commission





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 17 CFR Part 240



Processing Requirements for Cancelled Security Certificates; Final Rule

  Federal Register / Vol. 68, No. 246 / Tuesday, December 23, 2003 / 
Rules and Regulations  

[[Page 74390]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-48931; File No. S7-18-00]
RIN 3235-AH94


Processing Requirements for Cancelled Security Certificates

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Final rule.

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SUMMARY: The Commission is revising its rules governing cancelled 
securities certificates to improve the processing of securities 
certificates by transfer agents. The Commission is adopting a new rule 
under the Securities Exchange Act of 1934 that will require every 
transfer agent to establish and implement written procedures for the 
cancellation, storage, transportation, destruction, or other 
disposition of securities certificates. This rule will require transfer 
agents to: Mark each cancelled securities certificate with the word 
``cancelled''; maintain a secure storage area for cancelled 
certificates; maintain a retrievable database of all of its cancelled, 
destroyed, or otherwise disposed of certificates; and have specific 
procedures for the destruction of cancelled certificates. Additionally, 
the Commission is amending its lost and stolen securities rule and its 
transfer agent safekeeping rule to make it clear that these rules apply 
to unissued and cancelled certificates.

EFFECTIVE DATE: The amendments will become effective on January 22, 
2004.

FOR FURTHER INFORMATION CONTACT: Jerry W. Carpenter, Assistant 
Director, or Thomas C. Etter, Jr., Special Counsel, at (202) 942-0178, 
Division of Market Regulation, Securities and Exchange Commission, 450 
Fifth Street, NW., Washington, DC 20549-1001.

SUPPLEMENTARY INFORMATION: The Commission is today adopting new Rule 
17Ad-19 and adopting amendments to existing Rules 17f-1, 17Ad-7, and 
17Ad-12.

I. Introduction

A. The Proposal

    On October 2, 2000, the Commission published for comment a release 
(``Proposing Release'') that proposed Rule 17Ad-19 under the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and proposed amendments to 
Exchange Act Rules 17f-1 and 17Ad-12.\2\ The proposed rule and rule 
amendments principally were designed to address problems associated 
with cancelled securities certificates. Rule 17Ad-19 as proposed would 
have required every transfer agent that handles, processes, or stores 
securities certificates to establish and implement written procedures 
for the cancellation, storage, transportation, and destruction of 
retired securities certificates. The rule would require transfer agents 
to: Mark each cancelled securities certificate with the word 
``cancelled;'' maintain a secure storage area for cancelled 
certificates; maintain a retrievable database of all of its cancelled 
and destroyed certificates; and have specific procedures for the 
destruction of cancelled certificates. Additionally, proposed 
amendments to Rule 17f-1 (the lost and stolen securities rule) would 
have: Required the tracking of securities certificates, cancelled or 
otherwise, in transit between reporting institutions; established time 
frames for making required ``inquiries'' about lost, stolen, missing, 
or counterfeit securities under Rule17f-1; and defined certain terms 
for purposes of the rules. Finally, proposed amendments to Rule 17f-1 
and Rule 17Ad-12 (the transfer agent safekeeping rule) would have made 
clear that unissued and cancelled securities certificates must be 
safeguarded under Rule 17Ad-12 and that they fall within the 
Commission's Lost and Stolen Securities Program under Rule 17f-1.
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    \1\ 15 U.S.C. 78a et seq.
    \2\ 17 CFR 240.17f-1 and 240.17Ad-12; Securities Exchange Act 
Release No. 43401 (October 2, 2000), 65 FR 59766 (October 6, 2000).
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    We are adopting the proposed new rule and rule amendments, with 
minor modifications as discussed below, substantially as they were 
proposed. Further, as discussed below, we have modified Rule 17Ad-19 
from the proposal in response to comments to address situations where 
cancelled securities are ``otherwise disposed of.''

B. The Commission's Goals

    The new rule and rule amendments promote several fundamental 
Commission goals: Improving the safety and efficiency in processing and 
transferring securities; reducing or eliminating the physical movement 
of securities certificates; and reducing the potential for fraudulent 
use of cancelled securities certificates.\3\ The rules primarily relate 
to problems and costs associated with cancelled securities 
certificates.
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    \3\ See, generally, Exchange Act Section 17A(a), 15 U.S.C. 78q-
1(a); Section 17(f)(1), 15 U.S.C. 78q(f)(1); Securities Act 
Amendments of 1975, Senate Comm. on Banking, Housing & Urban 
Affairs, S. Rep. 94 to accompany S.249, 58-59 (1975); Securities 
Industry Study, H.R. Report of the Subcom. on Commerce & Finance, 
House Rep. No. 92-1519, pp. 68-70, 75-76 (1972).
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    In particular, we address the problem that, until properly 
destroyed or disposed of, cancelled securities certificates can 
resurface in the marketplace and can be and have been used to defraud 
members of the public or financial institutions. Requiring better 
procedures for processing and destroying cancelled certificates will 
reduce this potential for harm.

C. Comment Letters

    The Commission received 13 comment letters on the proposed rule and 
proposed rule amendments.\4\ Ten commenters generally expressed support 
for proposed Rule 17Ad-19 and the proposed amendments to Rules 17f-1 
and 17Ad-12 and for the Commission's efforts to address cancelled 
certificate fraud, and offered suggestions for modification or requests 
for clarification with respect to specific provisions of the proposal. 
As discussed below, we have adopted some of the suggestions. The 
remaining three commenters addressed only the issue of certificate 
destruction, arguing that because securities certificates are 
culturally important due to their historical, aesthetic, and 
collectors' values, they should be preserved and not destroyed. We 
discuss these comments below.
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    \4\ The Commission received comment letters from five transfer 
agents, one broker-dealer, one bank, one business corporation, one 
trade group representing transfer agents, one trade group 
representing investment companies, the president of an organization 
representing collectors of securities certificates, a finance 
professor, and a group of business students at Florida State 
University. Letters from James J. Angel, Ph.D., George Washington 
University (October 19, 2000); Loren Hanson, Manager, Shareholder 
Relations, Otter Tail Power Co. (October 24, 2000); Frank 
Hammelbacher, Norrico, Inc. (October 30, 2000); John E. Nolan, 
Senior Vice President, Raymond James & Associates, Inc. (November 2, 
2000); Charles V. Rossi, Division President, EquiServe (December 4, 
2000); Steven Turowski, Senior Regulatory Counsel, PFPC Inc. 
(December 4, 2000); Kathleen C. Joaquin, Director, Transfer Agency & 
International Operations, Investment Company Institute (``ICI'') 
(December 5, 2000); Daniel M. Hill, Assistant Vice President, U.S. 
Bank Trust National Association (December 6, 2000); John F. Kuntz, 
Vice President and Assistant General Counsel, Chase-Mellon 
Shareholder Services (December 14, 2000); Keith G. Berkheimer, 
President, CTA (December 14, 2000); Robert A. Kerstein, President, 
Scripophily.com (March 5, 2001); and Robert Serrano et al, business 
students at Florida State University (dated November 29, 2000, 
received at the Commission February 19, 2002). These comment letters 
are available for inspection and copying in the Commission's Public 
Reference Room, 450 Fifth Street, NW., Washington, DC 20549.

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[[Page 74391]]

II. Background

A. History

    When a security certificate is retired, such as when a bond is 
redeemed or ownership of stock is transferred, the certificate is 
cancelled by the transfer agent. Cancellation normally involves both an 
accounting entry on the books of the transfer agent and an alteration 
of the certificate itself, though either by itself is an act of 
cancellation. After cancellation of a registered certificate,\5\ the 
Exchange Act's record retention rules for transfer agents require that 
the certificate or appropriate record of the certificate be retained 
for not less than six years.\6\ In recent years, many corporate bond 
issues have been called for redemption and cancelled decades before 
their maturities.\7\ These bond redemptions and an active stock market 
have generated vast amounts of cancelled securities certificates that 
must be processed, stored, and safeguarded. Certificate processing of 
retired certificates can involve significant costs and risks. The 
following examples illustrate some of these risks.
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    \5\ The term ``registered'' as used in 17 CFR 240.17Ad-6(c) with 
reference to cancelled certificates means certificates registered in 
the name of an owner, as distinct from bearer certificates that were 
in wide circulation when this rule was promulgated in 1977.
    \6\ 17 CFR 240.17Ad-6(c) and 240.17Ad-7(d). See also 17 CFR 
240.17Ad-7(f). It has been suggested that transfer agents should 
have the option to destroy cancelled certificates shortly after 
cancellation. See comment letter from Steven Turowski, Chief 
Regulatory Counsel, PFPC, Inc, (December 4, 2000). While current 
practices are changing and some transfer agents may want to select 
alternative means, such as electronic imaging, to satisfy the 
recordkeeping requirements for cancelled certificates, many transfer 
agents may prefer to satisfy these recordkeeping requirements by 
maintaining the physical certificates themselves. Nevertheless, in 
the Proposing Release, we invited commenters to address this issue, 
and their comments are summarized below.
    We note that we have also proposed amendments to Securities 
Exchange Act Rule 17Ad-7, 17 CFR240.17Ad-7, which if adopted would 
make clear that transfer agents may use certain alternative means to 
store cancelled securities certificates provided that the 
certificates are electronically stored in conformity with the terms 
of Rule 17Ad-7. Because these electronic records satisfy the 
recordkeeping obligations, the paper certificates would not be 
required to be kept by Rule 17Ad-7. Securities Exchange Act Release 
No. 48036 (June 16, 2003), 68 FR 36951.
    \7\ Among the reasons for these bond redemptions has been the 
decline in long-term interest rates since the early 1980s.
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    In a 1992 case, cancelled bond certificates with a face amount of 
approximately $111 billion disappeared after being delivered from a 
transfer agent's warehouse to a certificate destruction vendor. The 
certificates, issued by many well-known public companies, later began 
to resurface worldwide. A number of banks and brokers as well as 
individuals were defrauded through sales of the cancelled certificates 
for cash or through use of the cancelled certificates as loan 
collateral. The bulk of these cancelled certificates still remain 
unaccounted for and continue to resurface in the marketplace.\8\
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    \8\ The Commission brought an action against this transfer agent 
for its failure to report stolen certificates pursuant to Rule 17f-
1, 17 CFR 240.17f-1, and for its failure to safeguard securities in 
its possession pursuant to Rule 17Ad-12, 17 CFR 240.17Ad-12. The 
transfer agent agreed to pay a civil penalty of $750,000 and to 
cease and desist from future violations of Sections 17(f)(1) and 17A 
of the Exchange Act and Rules 17f-1 and 17Ad-12 thereunder. SEC v. 
Citibank, N.A., Civil Action No. 92-2833 (USDC, DC, 1992). See also 
Securities Exchange Act Release No. 31612 (December 17, 1992).
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    In a similar case in 1994, cancelled bonds with a face amount of 
approximately $6 billion disappeared after being delivered from a 
transfer agent's record center to two certificate destruction vendors. 
The cancelled certificates, issued by well-known companies, later began 
to resurface worldwide. Again, the bulk of these cancelled certificates 
remain unaccounted for and continue to resurface in the marketplace.\9\
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    \9\ The Commission and the Comptroller of the Currency brought a 
joint action against this transfer agent for its failure to report 
as stolen the cancelled certificates pursuant to Rule 17f-1 and its 
failure to safeguard securities in its possession pursuant to Rule 
17Ad-12. The transfer agent agreed to pay a civil penalty of 
$100,000 and to cease and desist from future violations of Sections 
17(f)(1) and 17A of the Exchange Act and Rules 17f-1 and 17Ad-12 
thereunder. As remedial measures, the transfer agent also agreed to 
mark cancelled certificates with the word ``cancelled'' and to adopt 
other safeguards. The Chase Manhattan Bank, Securities Exchange Act 
Release No. 34784 (October 4, 1994).
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    In another instance, a transfer agent's shipping bags filled with 
cancelled certificates were stolen while in commercial air transit. The 
transfer agent regularly shipped cancelled certificates from the West 
Coast to a New York bank for processing. The transfer agent, however, 
did not record the contents of its shipments and, in effect, relied on 
its New York bank processing agent to do its bookkeeping. When the 
shipping bags were stolen, neither the transfer agent nor its bank 
processing agent realized that the certificates were missing. A number 
of the certificates later resurfaced in off-market transactions.\10\
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    \10\ The Commission and the Office of the Comptroller of the 
Currency brought a joint action against this transfer agent for 
violation of Section 17(f)(1) of the Exchange Act and Rule 17f-1 
thereunder for failure to report the missing securities to the 
Commission's Lost and Stolen Securities Program. The transfer agent 
agreed to pay a $75,000 civil penalty and to cease and desist from 
any further violations of Section 17(f)(1) and Rule 17f-1 
thereunder. Seattle-First National Bank, Securities Exchange Act 
Release No. 34293 (July 1, 1994).
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    Other instances have involved bulk thefts of cancelled certificates 
from warehouses. In some cases, the records of the certificate numbers 
of the stored certificates also were stolen because they were stored 
with the certificates. Even in cases where certificate records for 
stolen securities were available, they generally were of limited value 
in identifying the stolen securities because the records were organized 
chronologically by cancellation dates rather than by certificate 
numbers. As a result, the necessary information was not easily 
retrievable from the records.
    A common transfer agent practice contributed to this widespread 
problem. In physically cancelling certificates, many transfer agents 
marked the certificates only with pinhole-sized perforations. These 
tiny perforations were intended to indicate cancelled status without 
defacing the certificates and impairing their usefulness as records. 
The pinholes, which usually show the cancellation date and the initials 
of the transfer agent within a space about the size of a quarter, often 
have been barely noticeable. In some cases, they have been mistaken for 
notary or authentication markings. Even more problematic has been the 
practice by some transfer agents of not marking certificates at all to 
indicate that the certificates have been cancelled.
    In many cases, the stolen certificates have reentered the 
marketplace either through sales or as collateral for loans, resulting 
in substantial fraud on public investors, public companies, creditors, 
broker-dealers, and transfer agents. Not only do situations such as 
these present potential liability for the transfer agents responsible, 
but they consume the resources of regulatory and criminal law 
enforcement agencies.
    As discussed below, the Commission hopes that these unfortunate 
practices have been or are being eliminated by the transfer agents 
themselves through improved trade practices. But without standards and 
verification, there is no way to be certain. The new rule and rule 
amendments address these practices and will permit the Commission's 
examiners to verify compliance as a routine part of their examination 
schedules.

B. The Commission's Authority

    Sections 17(f) and 17A of the Exchange Act provide the Commission 
with authority and responsibility to protect investors and securities 
industry participants from the dangers associated with the fraudulent 
use of cancelled

[[Page 74392]]

certificates.\11\ Section 17(f)(1), in fact, is designed to curtail the 
profitability of and the unlawful trafficking in lost and stolen 
securities certificates.\12\ Section 17(a)(3) of the Act expressly 
provides the Commission with rulemaking authority over transfer agent 
recordkeeping matters.\13\ In Section 17A(a), Congress directs the 
Commission to carry out certain objectives including the safeguarding 
of securities and funds that are related to securities transfers and 
the elimination of inefficient securities processing that imposes 
unnecessary costs on investors.\14\ The Commission has broad discretion 
in carrying out these mandates.\15\ We believe that most situations 
where cancelled securities certificates resurfaced in the marketplace 
have resulted from a lack of good internal control systems for the 
processing, storage, transportation, or destruction of the 
certificates. The rules that we adopt today are intended to provide for 
more efficient and secure certificate processing, particularly of 
cancelled certificates.
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    \11\ 15 U.S.C. 78q(f) and 78q-1.
    \12\ Section 17(f)(1), 15 U.S.C. 78q(f)(1).
    \13\ 15 U.S.C. 78q(a)(3).
    \14\ 15 U.S.C. 78q-1(a). See Securities Acts Amendments of 1975, 
Comm. on Banking, Housing and Urban Affairs, Sen. Rep. No. 75 to 
Accompany S.249, 56-58 (1975).
    \15\ ``The Commission is empowered with broad rulemaking 
authority over all aspects of a transfer agent's activities as a 
transfer agent.'' Id. at 57.
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III. Final Rules

A. Rule 17Ad-19: Processing of Cancelled Certificates

    Currently, the processing of cancelled certificates is largely 
governed by industry practices. For example, in 1994, the Securities 
Transfer Association (``STA''), the largest transfer agent trade 
association,\16\ adopted guidelines for its members which, among other 
things, called for marking cancelled certificates with the word 
``cancelled'' and for greater security measures in certificate storage 
and destruction.\17\ However, these guidelines are not mandatory, and 
not all transfer agents follow them. Therefore, because cancellation is 
the critical first step in the processing of retired securities 
certificates, we believe that rulemaking is necessary to strengthen and 
standardize this process.
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    \16\ STA has over 400 members, the majority of whom are 
registered transfer agents. For STA's Web site, see www.stai.org.
    \17\ Rules of the STA, Section 1.26 (Recommended Procedures for 
Cancelled Securities).
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1. Discussion of Text
    Rule 17Ad-19 requires each transfer agent to have and implement 
written procedures for the cancellation, storage, transportation, 
destruction, or other disposition of securities certificates. At a 
minimum, the written procedures must provide: (1) For controlled access 
to any cancelled certificate facility; (2) that the transfer agent 
clearly apply to the face of each cancelled certificate the word 
``cancelled'' unless the transfer agent's procedures will cause the 
certificate to be destroyed in accordance with other Commission rules 
within three business days of its cancellation; (3) that the transfer 
agent keep a readily retrievable record of each cancelled certificate 
with identifying data consisting of CUSIP number, certificate number 
including prefix or suffix, denomination, registration, issue date, and 
cancellation date; (4) that the transportation of cancelled 
certificates be made in a secure manner with a record of the 
certificates in transit kept separately; (5) that the transfer agent 
keep a readily retrievable record of each destroyed certificate or 
certificate otherwise disposed of;\18\ and (6) that authorized 
personnel of the transfer agent, supervise, witness and document the 
destruction of certificates.
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    \18\ Required certificate detail is: CUSIP number, certificate 
number including prefix or suffix, denomination, registration, issue 
date, and cancellation date. See 17 CFR 240.17Ad-9(a) and 240.17f-
1(c)(6). The term ``certificate otherwise disposed of'' is intended 
to include the small minority of certificates that are not destroyed 
by transfer agents or other agents and may, for example, become the 
property of collectors or of dealers in collectibles.
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    We are modifying proposed Rule 17Ad-19 to require that transfer 
agents maintain records not only of the certificates that they or their 
agents destroy but also of those certificates that they dispose of by 
any other means and which may, for example, become the property of 
collectors or dealers in collectibles. In this regard, we note that 
cancelled certificates, after a period in transfer agent storage, are 
generally destroyed by the transfer agent or destroyed by some other 
party acting at the direction of the transfer agent or the issuer. 
However, a small amount of cancelled certificates may find their way 
from transfer agents to collectors or perhaps to other places currently 
unknown to us. Accordingly, to make the rule as complete as possible, 
we are inserting in paragraph (b) the words ``or other disposition'' 
into the phrase ``destruction of securities certificates.'' The term 
``otherwise disposed of'' requires that a record be maintained of how 
(as by sale or gift) and to whom (with name and address) the 
certificates were disposed of and the date of disposition. In the text 
of Rule 17Ad-19, minor changes have been made to paragraphs (a)(2) and 
(a)(4) for clarification and specificity. Rule 17Ad-19 also includes 
procedures for the Commission to provide conditional or unconditional 
exemptions from any of these provisions of the rule in appropriate 
cases upon written request or upon its own motion. A related amendment 
to Rule 17Ad-7(i) requires transfer agents to maintain records to 
demonstrate compliance with the requirements of Rule 17Ad-19 for not 
less than three years, the first year in an easily accessible 
place.\19\
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    \19\ 17 CFR 240.17Ad-7(i).
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2. Comment Letters
    Many comments received in reply to the Proposing Release addressed 
particular aspects of proposed Rule 17Ad-19.
    Three commenters,\20\ objected to the proposed requirement that 
certificates must be ``cancelled'' unless existing procedures would 
cause their destruction ``within 72 hours of their cancellation.'' They 
each recommended that ``72 hours'' be changed to ``three business 
days'' to avoid problems with weekends and holidays. We agreed that 
this change would achieve our goal, while avoiding problems with 
weekends and holidays and, therefore, we made this modification.
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    \20\ EquiServe, ICI, and PFPC, Inc. PFPC, Inc. is a member of 
the PFPC Financial Services Group, Inc.
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    ChaseMellon asked for clarification whether the provision in the 
rule concerning certificates in transit would apply to shipments 
between a transfer agent's own offices and affiliates or only to 
shipments between unaffiliated reporting institutions, vendors, and 
others. The transportation provision of the rule is intended to apply 
only to shipments between a reporting institution and unaffiliated 
parties. We have modified the rule to reflect this point.\21\
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    \21\ This provision is intended to address shipments between 
unaffiliated financial institutions. We believe that less risk of 
this type of loss exists in intrafirm shipments where the same firm 
controls both the sending and receiving offices. We note, however, 
that a transfer agent's general obligation to safeguard funds and 
securities applies to intrafirm shipments. See Exchange Act Rule 
17Ad-12, 15 CFR 240.17Ad-12.
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    ChaseMellon asked whether having written procedures that are 
consistent with STA's recommended guidelines would constitute 
compliance with Rule 17Ad-19. Because some requirements of Rule 17Ad-19 
may differ from those of the STA's guidelines, transfer agents must be 
sure they are in compliance with the requirements of Rule 17Ad-19. 
ChaseMellon also requested clarification whether the records required 
by Rule

[[Page 74393]]

17Ad-19 for cancelled certificates require retrievable information both 
for certificates that are (1) cancelled but not destroyed and (2) 
cancelled and destroyed. The rule requires that the applicable 
information be kept for both types of cancelled certificates.
    ChaseMellon asked whether maintaining cancelled certificate data 
based solely on cancellation dates would be adequate under Rule 17Ad-
19. Cancellation date recordkeeping has led to identification problems 
in the past when cancelled certificates were lost or stolen. Data 
organized by cancellation date, rather than by CUSIP and certificate 
number, has proved to be of little value when there is a need for 
prompt identification of lost, missing, or stolen certificates. It is 
important that CUSIP numbers and certificate numbers are readily 
available for the prompt reporting of lost, missing, or stolen 
certificates to the Lost and Stolen Securities Program and for the 
prompt alerting of law enforcement authorities and other financial 
institutions. Accordingly, this requirement is contained in Rule 17Ad-
19.
    ICI asked whether the new recordkeeping provisions applicable to 
cancelled certificates would apply retroactively (i.e., apply to 
certificates previously cancelled), in which case ICI suggested the 
provisions would be burdensome on transfer agents. The new 
recordkeeping provisions will apply only prospectively, becoming 
effective sixty days after the date of adoption of the rule.

B. Rule 17f-1: Lost and Stolen Securities Program

1. Background of Lost and Stolen Securities Program
    Section 17(f)(1) of the Exchange Act requires the Commission to 
operate a Lost and Stolen Securities Program (``LSSP'' or 
``Program'').\22\ Congress directed the establishment of the Program in 
1975 to curtail trafficking in lost, stolen, missing, and counterfeit 
securities certificates.\23\ Rule 17f-1 under the Exchange Act governs 
LSSP operations. The Program consists mainly of a database for 
securities that have been reported lost, stolen, missing, or 
counterfeit. Operationally, the Program has two essential parts: 
``reports'' and ``inquiries.'' Most financial institutions (including 
exchanges, banks, brokers, clearing agencies, and transfer agents), 
which Rule 17f-1 designates ``reporting institutions,''\24\ are 
required to report any certificates that they discover to be lost, 
stolen, missing, or counterfeit.\25\ These institutions also must 
inquire of the Program about any securities certificate valued at more 
than $10,000 that comes into their ``possession or keeping.''\26\ These 
financial institutions also may voluntarily report or inquire about 
other certificates.\27\
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    \22\ 17 U.S.C. 78q(f)(1).
    \23\ See Lost and Stolen Securities Program, Hearings before the 
Permanent Subcommittee on Investigations of the Senate Committee on 
Government Operations, 93d Cong., 1st Sess. (1973), 2d Sess. (1974). 
S.249, which became the Securities Acts Amendments of 1975, was 
amended on the floor of the Senate to add legislation concerning 
lost, stolen, missing, and counterfeit securities. 121 Cong. Rec. 
6186 (April 17, 1975). See also Conference Report to Accompany 
S.249, 94th Cong., 1st Sess. 103-104 (1975).
    \24\ The term ``reporting institution'' is defined in 17 CFR 
240.17f-1(a)(1).
    \25\ 17 CFR 240.17f-1(c) and (d).
    \26\ 17 CFR 240.17f-1(d)(iv). The rule's inquiry requirement 
applies to any securities certificate received as part of a 
transaction whose aggregate value (face value in the case of debt or 
market value in the case of stocks) exceeds $10,000. Required 
inquiries under existing Rule 17f-1(d) would not be changed by the 
amendment.
    \27\ E.g., inquiries on securities certificates valued at less 
than $10,000. 17 CFR 17f-1(e).
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    The Program is operated by the Securities Information Center 
(``SIC'') as the Commission's designee pursuant to a contract. SIC 
receives all reports and inquiries, responds to inquiries, and 
maintains the Program's database. As of December 31, 2002, the 
Program's database reflected securities with a value of approximately 
$672 billion. There were 26,011 reporting institutions.\28\ During the 
year 2002, reports were made on 926,475 certificates (an average of 
3,676 certificates per business day); inquiries were made on 5,231,310 
certificates (an average of 20,759 certificates per business day); and 
matches or ``hits'' resulting from inquiries occurred on 224,338 
certificates, which had a value of approximately $36.5 billion.\29\ The 
hits essentially warned the inquirers that the certificates had been 
reported as lost, stolen, missing, or counterfeit and were not eligible 
for transfer.
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    \28\ Reporting instructions were comprised of 13,948 banks, 
11,116 securities organizations, and 947 non-bank transfer agents. 
``Securities organizations'' are: (1) National securities exchanges, 
(2) national securities exchange members, (3) national securities 
exchange member firms, (4) registered securities associations, (5) 
registered securities association members, (6) securities brokers, 
(7) securities dealers, and (8) municipal securities dealers.
    \29\ Securities Information Center, ``Annual Statistics for the 
Period January 1, 2002, through December 31, 2002.''
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2. Rule 17f-1 ``Requirements for Reporting and Inquiry With Respect to 
Missing, Lost, Counterfeit or Stolen Securities''
    a. ``Securities Certificate''. We have amended Rule 17f-1 by adding 
subparagraph (a)(6), which defines ``securities certificate'' to 
clarify that the scope of Rule 17f-1 covers the life span of a 
certificate from the time it is printed until the time it is destroyed. 
Accordingly, the rule covers: (1) Certificates that have been printed 
but not issued; (2) certificates that have been issued and remain 
outstanding; (3) certificates that have been issued and reacquired by 
the issuer; and (4) certificates that have been cancelled.\30\ It 
likewise includes certificates that are counterfeit or reasonably 
believed to be counterfeit. As discussed below, we also have 
incorporated this definition of ``securities certificate'' into Rules 
17Ad-12(b) and 17Ad-19(a)(8).\31\
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    \30\ For purposes of market value under the inquiry requirements 
of Rule 17f-1(d), the cancelled certificates would be given the 
market value of ``live'' securities of the same issue.
    \31\ 17 CFR 240.17Ad-12(b) and 240.17Ad-19(a)(8).
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    We received several comments on this proposal. ICI and Otter Tail 
requested clarification of the term ``printed but not issued.'' 
Specifically, they asked what identifying information must be included 
on certificates to qualify such certificates for reporting to LSSP. 
Under Rule 17f-1, as amended, a securities certificate is ``printed but 
not issued'' when it sets forth: The name of the issuer, the CUSIP 
number, the certificate number, and the authenticating signatures of 
the issuer. Therefore, a securities certificate to be considered 
``printed but not issued'' does not have to set forth: the name of the 
registrant, the number of units, or the countersignature of the 
transfer agent.
    U.S. Bank asked whether the proposed definition of ``securities 
certificate'' would include both registered and bearer certificates, 
noting that including bearers and their coupons would be burdensome on 
transfer agents. U.S. Bank suggested that if coupons are to be 
included, they should be subject to cancellation practices at the 
transfer agent's discretion which could include such methods as ``hole 
punching'' of coupons as an acceptable means of cancellation. In the 
rule as amended, the definition of ``securities certificate'' in 
subparagraph (a)(6) of Rule 17f-1 includes both registered and bearer 
certificates. Although processing bearer certificates may in some ways 
be more onerous to transfer agents than processing registered 
certificates, we do

[[Page 74394]]

not believe that bearer certificates can reasonably be excluded from a 
definition of securities certificates. We note, too, that any burden 
caused by bearer certificates is diminishing year-by-year due to the 
Tax Equity and Fiscal Responsibility Act of 1982, which essentially 
eliminated the issuance of bearer certificates.\32\
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    \32\ Pub.L. 97-248 (September 9, 1982), 26 U.S.C. 309 et seq. 
While not prohibiting bearer securities, TEFRA imposes financial 
disadvantages on both their issuers and their holders. See, e.g., 26 
U.S.C. 6049.
---------------------------------------------------------------------------

    Moreover, the definition of ``securities certificate'' of Rule 17f-
1(a)(6) does not contemplate bond coupons, which are expressly exempted 
from the reporting and inquiry provisions of Rule 17f-1 by its 
subparagraph (f)(2). We note, however, that while, due to the 
exemption, coupons are not securities certificates or reportable within 
the meaning of Rule 17f-1, they are not exempted from Rule 17Ad-12 and, 
accordingly, they do come within the ``funds and securities'' 
safeguarding provisions of Rule 17Ad-12(a). In any case, Rule 17Ad-19 
does not establish specific cancellation practices for coupons. We 
believe that it is appropriate for coupon cancellation to be governed 
by accepted, reasonable industry practices at this time.
    b. ``Missing'' Securities Certificates. The term ``missing'' is 
used in Section 17(f)(1) of the Exchange Act and in Rule 17f-1 
thereunder, but until now it was not defined.\33\ The term generally 
has been used to describe certificates that cannot be located, such as 
certificates that are not found during a count or audit, but that are 
thought to be misfiled rather than lost or stolen.
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    \33\ While parallel terms (lost, stolen, and counterfeit) also 
are not defined by the statute or the rule, we believe that their 
meanings are clear from the context.
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    There are other circumstances, however, where a transfer agent does 
not have possession of a certificate though it believes, but cannot be 
certain, that it knows what happened to the certificate, i.e., that it 
was destroyed. Some would claim that such a certificate is not 
``missing'' but is more accurately described as ``destroyed,'' and that 
accordingly a reporting institution is not required to report the 
certificate under Rule 17f-1 as being missing, lost, or stolen. For 
example, if cancelled certificates are stored by a transfer agent in a 
warehouse that is destroyed by a fire, the transfer agent may 
reasonably believe but cannot be certain (i.e., to the point of 
providing a guarantee) that all the stored certificates were 
destroyed.\34\ In such a situation, especially where arson is found, 
there is a risk that some of the certificates may not have been 
destroyed and may resurface in the marketplace.
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    \34\ On March 9, 1997, a major warehouse fire, believed to have 
been caused by arson, apparently destroyed a large number of 
cancelled securities certificates held in storage by a transfer 
agent. See ``A Burning Question: How Safe Are Your Records,'' 
Business Week, June 23, 1997, at page 130E4.
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    We are amending Rule 17f-1(a)(7), as proposed, to define the term 
``missing'' for purposes of Rule 17f-1 as any certificate that: (1) 
Cannot be located but which is not believed to be lost or stolen or (2) 
the transfer agent believes was destroyed but was not destroyed 
according to the certificate destruction procedures required by Rule 
17Ad-19. We received no comments on this proposal.
    As a result, it will be clear that reporting institutions are 
required to report the above-described types of missing certificates to 
LSSP. Then, if such certificates later resurface, there will be a high 
degree of likelihood that they will be promptly identified and 
interdicted through LSSP.
3. LSSP Reports of Cancelled Certificates
    The Commission has brought enforcement actions for violations of 
Rule 17f-1 where cancelled securities certificates that were lost or 
stolen were not reported to LSSP.\35\ Nevertheless, there appears to be 
some uncertainty about whether this rule applies to cancelled 
certificates.\36\ We believe clarification would be useful.
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    \35\ Supra notes 8, 9 and 10.
    \36\ For example, one court has found that because ``cancelled 
securities'' were not expressly included in Rule 17f-1, they were 
not subject to the reporting requirements of that rule. A.G. Edwards 
& Sons, Inc. v. Centocor, Inc., Civil Action No. 91-6133 (E.D. PA, 
1992).
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    We believe that cancelled certificates are within the meaning and 
purpose of Rule 17f-1. Like counterfeit certificates, cancelled 
certificates have no investment value, but they can be used to 
defraud.\37\ The inclusion of the definition of ``securities 
certificate'' in Rule 17f-1(a)(6) as discussed above clarifies that 
cancelled certificates are reportable to LSSP.
---------------------------------------------------------------------------

    \37\ In United States v. Jackson, 576 F.2d. 749, 757 (8th Cir. 
1978), the court recognized that stolen blank stock certificates 
have no intrinsic value as investments but that they have a 
``thieves' market value'' as demonstrated by an FBI undercover 
operation, which was part of the case, where the certificates were 
purchased at 40% of their apparent market value.
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4. LSSP Inquiries
    In Rule 17f-1, paragraph (c) governs reports and paragraph (d) 
governs inquiries about lost, stolen, missing, and counterfeit 
securities. While the rule specifies time frames for making reports, it 
specifies no time frames for making the inquiries.\38\
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    \38\ See Section III.B.1 above for description of inquiries.
---------------------------------------------------------------------------

    When Rule 17f-1 was adopted in 1976, requirements for making 
inquiries were intended to accommodate business practices and to avoid 
commercial disruptions.\39\ The time frames for making inquiries were 
left to the business judgment of inquiring companies.\40\ Since then, 
business conditions have changed substantially, in large part due to 
improvements in automation and communications. Inquiries to LSSP by 
financial institutions have become quite routine and automated. In 
addition, the lack of any time limit for making required inquiries has 
made compliance with the rule difficult to monitor, and it has produced 
judicial comment.\41\ No public comment was received in response to our 
Proposing Release concerning the time frames for inquiries.
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    \39\ When enacting the underlying statute, Congress stated that 
the Commission should carefully weigh the benefits of mandating 
inquiries against the costs and effects on efficient business 
practices. Conference Report on S. 249, Securities Acts Amendments 
of 1975, 94th Cong., 1st Sess. 104 (1975). In 1976, the Commission 
observed that the system for inquiries should avoid undue 
disruptions to commercial transactions and chose not to set time 
limits for inquiries. Securities Exchange Act Release No. 12030 
(January 20, 1976), 41 FR 04834.
    \40\ In 1979, when the Commission asked for comments from the 
industry, reporting institutions said they favored a policy of 
leaving to their own business judgment the time frames for valuing 
and inquiring of LSSP about securities that came into their 
possession. The Commission accepted that position. See ``Inquiry 
Time Frames,'' Securities Exchange Act Release No. 15683 (March 29, 
1979), 44 FR 20614.
    \41\ The Seventh Circuit Court of Appeals observed that the 
addition of a precise time frame for making required inquiries would 
improve the operation of the rule. First National Bank of Cicero v. 
Lewco Securities Corp., 860 F.2d 1407, 1416, n.14 (7th Cir. 1988). 
The court also said that whether an institution meets the test of 
``good faith'' required for bona fide purchaser status with respect 
to securities certificates may depend on whether it has met the 
inquiry requirements of Rule 17f-1. Id. at 1413-1415. See also 
Yadley and Ilkson, ``Bona Fide Purchasers of Lost and Stolen 
Securities: Meeting the `Good Faith' and `Notice' Requirements,'' 5 
George Mason U.L. Rev. 101, 127-133 (1982).
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    Accordingly, we are adding subparagraph (d)(3), as proposed, to 
Rule 17f-1 which provides that inquiries must be made by the end of the 
fifth business day after a certificate comes into the ``possession or 
keeping'' of a reporting institution.\42\ The amendment also provides 
that inquiries shall be made before the certificate is sold, used as 
collateral, or sent to another reporting institution if

[[Page 74395]]

occurring sooner than the end of the fifth business day.
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    \42\ The term ``reporting institution'' is defined in 17 CFR 
240.17f-1(a)(1).
---------------------------------------------------------------------------

5. Securities Shipments
    We proposed to add to Rule 17f-1(c)(2)(ii) a requirement that 
transfer agents track shipments of securities certificates, including 
cancelled certificates, between reporting institutions. When such a 
shipment becomes unaccounted for (for example, when the delivering 
institution fails to receive notice of receipt of the shipment), the 
delivering institution would be required to investigate to determine 
the facts. If the certificates cannot be located, under the proposed 
amendment, the delivering institution would be required to report to 
LSSP that the certificates are missing, stolen, or lost within a 
reasonable time not exceeding ten business days after the shipment was 
sent.
    We received five comments on this proposal.\43\ The commenters said 
that the proposed time frame of ten business days was too short a 
period for transfer agents to verify the non-delivery, to investigate 
the cause, and to report such matters to LSSP. Alternative suggestions 
were 15, 20, and 30 business days. In response to these suggestions, 
and upon consideration of the time we believe is reasonably needed to 
verify and investigate such non-deliveries, we have increased the time 
frame to 20 business days.
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    \43\ The five commenters were: CTA, EquiServe, ICI, PFPC, Inc., 
and U.S. Bank.
---------------------------------------------------------------------------

    EquiServe also commented that inasmuch as the overall purpose of 
the rule package is to address problems with retired or cancelled 
certificates, the securities shipment proposal in question should not 
apply to ``live'' certificates.\44\ EquiServe noted that, as proposed, 
the rule would appear to apply to all shipments of securities 
certificates, both live certificates and retired certificates, but it 
noted that live certificates tend to be shipped (1) in small amounts 
and perhaps only as single certificates and (2) in protected ways, such 
as by certified mail, that reflect their asset value. It also commented 
that it would be expensive for transfer agents to monitor the receipt 
of each such small mailing. EquiServe stated that retired certificates, 
however, tend to be shipped in bulk, and since they have no investment 
value there is less economic incentive to record and track such 
certificates. Thus, EquiServe suggests, the coverage of the rule 
proposal could be limited to retired certificates.
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    \44\ We are using the term ``retired certificate'' in a slightly 
broader sense that the term ``cancelled certificate.'' A certificate 
is ``retired'' at the time it is taken out of circulation, often by 
transfer or redemption, regardless of whether it has yet been 
cancelled.
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    We agree with EquiServe's reasoning on this matter. The proposed 
rule appears unnecessary for live certificates, which generally are 
carefully safeguarded by the securities industry and where the rule 
would impose higher expenses due to the small shipments usually 
involved.\45\ But we believe the proposal is necessary with respect to 
retired certificates where there is less financial incentive for the 
industry to safeguard the certificates and where shipments tend to be 
fewer and in bulk amounts so that the tracking expenses per certificate 
would be less. Accordingly, the proposed rule has been modified to 
apply only to shipments containing retired certificates.
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    \45\ See Rule 17Ad-12, 17 CFR 240.17Ad-12.
---------------------------------------------------------------------------

C. Rule 17Ad-12: Safeguarding of Funds and Securities

    Rule 17Ad-12 governs the safekeeping of funds and securities by 
transfer agents.
    It requires that securities be handled in a manner that is 
reasonably free from the risk of destruction, theft, or other loss. We 
proposed an amendment to Rule 17Ad-12 to make clear that cancelled 
certificates come within the meaning and purpose of Rule 17Ad-12.\46\ 
As we observed earlier, a cancelled certificate has no intrinsic value 
but, like a counterfeit certificate, it can be used to defraud. 
Accordingly, we have amended Rule 17Ad-12 as proposed to provide that 
the term ``securities'' used in that rule will have the same meaning as 
the term ``securities certificate'' defined in Rule 17f-1. As such, 
cancelled certificates will be expressly included in the coverage of 
Rule 17Ad-12, and transfer agents will be responsible for safeguarding 
cancelled certificates under their control.\47\
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    \46\ We have brought enforcement actions for violations of Rule 
17Ad-12 that involved cancelled securities certificates. See, e.g., 
SEC v. Citibank, N.A., supra at note 8.
    \47\ The only comment received concerning Rule 17Ad-12 concerned 
the new definition of ``securities certificate'' of Rule 17f1-
(a)(6), which is being incorporated by reference into Rule 17Ad-12. 
See Section III.B.2.a above.
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D. Other Comments

    Discussed below are other comments we received in response to the 
Proposing Release.
1. Exceptions for Certain Transfer Agents
    Paragraph (b) of proposed Rule 17Ad-19 would have applied only to 
those transfer agents involved in the ``keeping, handling, or 
processing of securities certificates.'' We requested comment on 
whether the proposal should apply to all registered transfer agents 
(approximately 900) or only to the approximately 800 registered 
transfer agents that maintain securityholder records for one or more 
securities issues and are directly involved with the keeping, handling, 
or processing of securities certificates. Excluded from the larger 
group would be ``named transfer agents'' (transfer agents that contract 
their transfer agent functions to transfer agent ``service Companies'') 
and transfer agents that conduct a specialty business not involving 
securities certificates.\48\ We received two comments.
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    \48\ For the definitions of ``named transfer agent'' and 
``service company'' refer to 17 CFR 240.17Ad-9(j) and (k).
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    CTA recommended that proposed Rule 17Ad-19 apply only to the 
transfer agents that maintain securityholder records, with an exception 
for issuers registered as transfer agents that act only for their own 
issues (``issuer-only transfer agents'') with average monthly volumes 
of 100 transfer items or less. Secondly, Otter Tail, an issuer-only 
transfer agent, said it averages only 30 certificates per month and 
that maintaining retrievable records and witnessing the destruction of 
certificates would require more staff and equipment and would be unduly 
expensive.
    As Rule 17Ad-19 is written, it is applicable only to transfer 
agents that are involved in the handling, processing, or storage of 
securities certificates.\49\ Therefore, a number of transfer agents, 
such as named transfer agents, are not subject to the provisions of 
Rule 17Ad-19, which includes the requirement to prepare written 
procedures. Nevertheless, a transfer agent that outsources its transfer 
agent work, which consists of handling, processing, or storage of 
securities certificates, to another transfer agent (i.e., a service 
company transfer agent) is legally responsible for ensuring that the 
provisions of Rule 17Ad-19 are followed with respect to the securities 
for which it is the named transfer agent. Therefore, both named 
transfer agents and service company transfer agents have 
responsibilities for complying with Rule 17Ad-19. Regarding the 
provisions of Rule 17Ad-19 dealing with the recordkeeping of the 
destruction of retired securities certificates, we do not believe that 
these requirements become burdensome simply because the number

[[Page 74396]]

of certificates being destroyed is small. Even a small transfer agent, 
for example, can designate a person to destroy certificates under 
specific procedures. We also believe that these limited burdens are 
justified by the rule's value as an antifraud measure. We do not think 
it is prudent, with recordkeeping rules that are linked to antifraud 
rules, to establish different standards based on the number of 
certificates processed, the number of transfers made, or the number of 
issuers serviced. We believe that the requirements of Rule 17Ad-19 are 
appropriate for all transfer agents that process certificates, 
regardless of their size or volume.
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    \49\ The new language of ``handling, processing, or storage of 
securities certificates'' more appropriately describes the procedure 
in question than the previously proposed language of ``keeping, 
handling, and processing of securities certificates.''
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2. Cancelled-in-Error Notations
    We requested comments in the Proposing Release on whether we should 
prohibit the use of ``cancelled-in-error'' notations,\50\ as some 
members of the securities industry previously had suggested. PFPC Inc. 
commented that such notations should be permitted provided they are 
used with a medallion signature guarantee.\51\ PFPC Inc. observed that 
cancelled-in-error notations can be useful when a certificate is 
mistakenly cancelled, especially when quick processing is essential or 
where resubmission is impossible because the endorsing party has died 
or is otherwise unable to act. U.S. Bank, however, recommended that 
transfer agents be prohibited from using cancelled-in-error stamps for 
registered certificates but be permitted to use them for bearer 
certificates, especially bearer bonds with coupons attached, because 
such certificates are not usually available in transfer agents' 
inventories. Inasmuch as these comment letters have specified uses for 
the practice that were not previously identified, the Commission has 
decided not to adopt any rule amendments with respect to prohibiting 
the use of ``cancelled-in-error'' notations until there is further 
study of the matter.
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    \50\ This refers to an industry practice of using hand stamps 
that state ``cancelled in error'' or similar language to avoid the 
time and expense of replacing certificates that are marked 
``cancelled'' by mistake.
    \51\ The use of a medallion signature guarantee would mean that 
the ``cancelled-in-error'' notation is guaranteed by a guarantor 
financial institution under a signature guarantee program pursuant 
to Exchange Act Rule 17Ad-15, 17 CFR 240.17Ad-15. Accordingly, the 
financial risk of the cancelled-in-error procedure would not be 
imposed on the transfer agent but on the guarantor or the surety for 
the guarantor.
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3. Data Retention
    CTA and PFPC Inc. commented that transfer agents should be given 
leeway concerning the data that they choose to maintain for the purpose 
of identifying securities certificates. CTA noted that instead of CUSIP 
numbers some transfer agents may prefer to use, for example, issuer 
identification numbers. We believe, however, that the use of CUSIP 
numbers, which is currently the most widely-used securities issue 
identification system, provides for uniformity and that it 
substantially aids the Commission, LSSP, and law enforcement programs. 
We also note that since 1979, Rule 17f-1(c)(6) has expressly required 
the inclusion of CUSIP numbers for purposes of securities certificate 
identification when making a report to LSSP.
4. Consideration of Additional Reporting Obligations
    Raymond James & Associates recommended that Rule 17f-1 be amended 
to include the additional reporting category of escheated securities 
(in addition to lost, stolen, missing, and counterfeit securities). The 
commenter also recommended that the reporting time frames under 
paragraph (c) of Rule 17f-1 be shortened.
    We note that Section 17(f)(1) expressly addresses only lost, 
stolen, missing, and counterfeit securities. From time to time, we have 
received recommendations to add to the reporting categories of Rule 
17f-1, including among others: Securities certificates that have 
escheated, have been called for redemption, are restricted, are the 
subject of litigation, or whose issuers are in bankruptcy. The subject 
of adding reporting categories to Rule 17f-1 has been studied 
periodically by securities industry groups, but no clear consensus has 
developed concerning either the scope of or the support for such a rule 
proposal. Therefore, at this time we are not expanding the number of 
reporting categories. However, there is nothing to prevent voluntary 
reporting of more categories if individual reporting companies choose 
to do so.\52\ Regarding the recommendation to shorten the reporting 
time frames in paragraph (c) of Rule 17f-1, the Commission believes 
that this issue requires further study.
---------------------------------------------------------------------------

    \52\ See paragraph (e) of 17 CFR 240.17f-1, which permits 
``permissive reports and inquiries.''
---------------------------------------------------------------------------

5. Perforations and the Word ``Cancelled''
    Regarding Rule 17Ad-19(b)(2), which requires that cancelled 
certificates be marked ``cancelled'' by stamp or perforation, PFPC Inc. 
recommended that the Commission specifically set forth the dimensions 
for the word ``cancelled'' and where it should be placed on a 
certificate. EquiServe questioned the Commission's criticism in the 
Proposing Release of the use of pin-hole sized perforation markings, 
which were previously used to indicate cancelled status, and asked 
``the what type of perforation'' would be deemed sufficient.\53\ At 
least for the present, we are leaving to securities industry 
practices,\54\ rather than to Commission action, the details of size of 
the word ``cancelled'' and how it should be marked on securities 
certificates (e.g., by stamp or by perforation). For the present, we 
believe it is sufficient to state that the term ``cancelled'' should be 
``clear and conspicuous.'' But if it should appear at a later time that 
further rulemaking or interpretations are necessary or appropriate to 
clarify these matters, we will provide them.
---------------------------------------------------------------------------

    \53\ The cancellation pinholes, as used by some major transfer 
agents, usually spelled out a certificate's cancellation date and 
the transfer agent's initials in a small circle. Such markings were 
intended to indicate that the certificates no longer had value as a 
security while preserving the certificates' form as a record. Except 
for the small circle of pinholes, the certificates usually appeared 
entirely presentable. The pinholes, however, often were not noticed 
by subsequent recipients of the certificates and, if noticed, their 
meaning was not necessarily clear.
    \54\ Some transfer agents have advised that they currently are 
stamping or perforating certificates with an abbreviation of the 
word ``cancelled.'' This is because they use older equipment that 
lacks the necessary space for nine letters. Typically, in these 
cases, one or two apostrophes or similar characters are used in 
place of up to four letters. To avoid the need for immediate 
purchase of new equipment, the Commission will interpret the use of 
such abbreviations as consistent with the requirement in Rule 17Ad-
12(c) that written procedures shall ``[r]equire that each cancelled 
certificate be marked with the work `cancelled' * * *.'' However, 
this interpretation shall apply only until a transfer agent using 
such older equipment acquires new equipment by purchase or other 
means that replaces the older equipment in question. Thereafter, the 
transfer agent must use all nine letters of the word ``cancelled'' 
in cancelling securities certificates.
---------------------------------------------------------------------------

6. Maintaining Certificates as Collectors' Items
    The Proposing Release requested comments on whether the Commission 
should mandate the destruction of cancelled certificates within thirty 
days of their cancellation. Three commenters, a finance professor, a 
non-public corporation, and the president of a securities certificate 
collectors' organization, \55\ argued against destroying old securities 
certificates because of their importance to financial history, their 
aesthetic merits, and their value to collectors in a field known as 
scripophily.
---------------------------------------------------------------------------

    \55\ James J. Angel, Ph.D., Georgetown Univ.; Frank 
Hammelbacher, Norrico Inc.; and Robert A. Kerstein, President, 
Scripology, Inc.
---------------------------------------------------------------------------

    We are sensitive to these interests. We believe that the adoption 
of sound

[[Page 74397]]

recordkeeping, safeguarding, and destruction procedures will greatly 
reduce the risk of improper use of cancelled certificates. Therefore, 
we do not believe it is necessary at this time to mandate destruction.
    In this regard, we note that cancelled securities certificates, 
after a period in transfer agent storage, are generally destroyed by 
the transfer agent or destroyed by some other party at the direction of 
the transfer agent or the issuer. However, a small amount of cancelled 
securities certificates find their way from transfer agents into 
collectors' markets. Accordingly, to make the rule as complete as 
possible, we are modifying proposed Rule 17Ad-19 to require that 
transfer agents maintain records not only of the certificates that they 
or their agents destroy but also of those certificates that they 
dispose of by any other means, such as by sale to collectors or to 
dealers for collectors. For certificates disposed of by such other 
means, transfer agents are required to maintain records of how the 
certificates were disposed and to whom, with such party's name and 
address, and the date of disposition.
7. Destruction of Certificates by Transfer Agents
    One transfer agent, PFPC Inc., recommended that questions of 
certificate retention or destruction be discretionary matters for 
individual transfer agents, and that transfer agents be given the 
option to destroy certificates within 72 hours of their cancellation, 
which it said would reduce fraud and storage expenses. Another transfer 
agent, Otter Tail, took a different position and said that the 
Commission should mandate certificate destruction at the end of the 
required six-year retention period. ICI and Mellon recommended that the 
Commission explore new overall requirements for cancelled securities 
certificates including (1) the use of electronic media and microfiche 
for recordkeeping purposes, and (2) the destruction of cancelled 
certificates, perhaps after they are scanned, imaged, and 
electronically stored.\56\ As noted above in footnote 6, the Commission 
is proposing amendments to Exchange Act Rule 17Ad-7, 17 CFR 240.17Ad-7, 
which if adopted would make clear that transfer agents could use 
certain alternative means to store cancelled securities certificates 
provided that the cancelled certificates first were electronically 
preserved in conformity with the terms of that rule.
---------------------------------------------------------------------------

    \56\ For a recent Commission rule that authorized the use of 
optical storage, refer to 15 CFR 240.17Ad-7(f). See Securities 
Exchange Act Release No. 44227 (April 27, 2001), 66 FR 21648 (May 1, 
2001).
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IV. Paperwork Reduction Act

    Certain provisions of the proposed rule and proposed amendments 
contain ``collection of information'' requirements within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA'').\57\ The Commission 
published a notice soliciting comments on the collection of information 
requirements in the proposing release and submitted them to the Office 
of Management and Budget (``OMB'') for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The title for the collection of 
information is: ``Record Retention Requirements for Registered Transfer 
Agents.'' OMB approved the collection and assigned it OMB Control No. 
3235-0136. The collection requirements are necessary to ensure the 
integrity of transfer agents' records and the safeguarding of 
securities certificates.
---------------------------------------------------------------------------

    \57\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    Rule 17Ad-19 contains collection of information requirements that 
are intended to ensure the integrity and completeness of transfer 
agents' records regarding physical securities certificates, in 
particular, cancelled securities certificates. Rule 17Ad-19 requires 
each registered transfer agent to: (1) Have a written statement setting 
forth its procedures for the cancellation, storage, transportation, 
destruction, or other disposition of securities certificates; (2) mark 
each cancelled certificate with the word ``cancelled'' on the face of 
the certificate; (3) supervise, witness and document the destruction of 
certificates; and (4) keep an easily retrievable record of each 
cancelled, destroyed, or otherwise disposed of certificate with 
identifying certificate data. The amendments to Rules 17f-1 and 17Ad-12 
involve no additional paperwork requirements.
    Rule 17Ad-19 incorporates the three-year record retention 
requirement of Rule 17Ad-7(i), but the amendments to Rules 17f-1 and 
17Ad-12 do not add any retention periods for recordkeeping 
requirements. The maintenance of written procedures by transfer agents 
under Rule 17Ad-19 would be mandatory. The written procedures are 
confidential and will not be available to the public, although they 
will be subject to examination by the Commission or other appropriate 
regulatory agencies. We note that an agency may not conduct or sponsor, 
and a person is not required to respond to, a collection of information 
unless it displays a currently valid control number.
    When the Commission proposed the rule and rule amendment, 
approximately 1,100 transfer agents were registered with the 
Commission. The Commission staff estimated that the average amount of 
time per transfer agent needed to comply with the collection of 
information requirements of proposed Rule 17Ad-19 would be 40 hours per 
transfer agent for developing the written procedures. The Commission 
staff further estimated that the average amount of time per transfer 
agent per year to comply with the collection of information associated 
with recording and tracking cancelled securities certificates would be 
50 hours per transfer agent per year, a figure that would vary greatly 
depending on the size of an entity and the volume of its business. 
Thus, assuming 1,100 registered transfer agents, it was estimated that 
the start-up collection of information requirements would require about 
44,000 hours (40 x 1,100), and the annual collection of information 
requirements would be about 55,000 hours (50 x 1,100). Thus, in October 
of 2000, the Commission staff estimated that the combined total during 
the first year would be about 99,000 hours.
    At this time, in contrast with the 1,100 transfer agents at the 
proposing stage, approximately 900 transfer agents are registered with 
the Commission, of which about 800 are actively involved in transfer 
agent activities.\58\ After further review and staff conversations with 
representative transfer agents, as discussed below in Section V, the 
Commission staff has lowered its estimate of the amount of time per 
transfer agent needed to comply with the collection of information 
requirements of Rule 17Ad-19. The lower staff estimates, as compared 
with the higher estimates in the Proposing Release, result from (1) 
lower than anticipated cost estimates in a survey of small transfer 
agents and (2) reports from both small transfer agents and large 
transfer agents (the latter group as represented by the Securities 
Transfer Association) that most of the proposed rule changes have 
already been put into effect over the past few years at most transfer 
agents. The Commission staff now estimates the time needed will range 
from about two hours for the smallest transfer agents to about 40 hours 
for the largest transfer agents. The staff believes that the average 
time per transfer agent to develop written

[[Page 74398]]

procedures will be about 20 hours. The Commission staff further 
estimates that the average amount of time per transfer agent per year 
to comply with the collection of information associated with recording 
and tracking cancelled securities certificates will be 20 hours per 
transfer agent per year, a combined 40 hours for the first year, all of 
which are figures that would vary greatly depending on the size of an 
entity and the volume of its business. Thus, assuming 800 registered 
transfer agents actively involved in transfer agent activities, the 
start-up collection of information requirements will require about 
16,000 hours (20 x 800), and the annual collection of information 
requirements will be about 16,000 hours (20 x 800). Thus, the estimated 
combined total during the first year will be about 32,000 hours.
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    \58\ The Commission notes that there is relative ease of 
entrance into and exit out of the transfer agent business, and the 
numbers of transfer agents at a given time are affected by the 
circumstances of the securities industry and the general economy.
---------------------------------------------------------------------------

    Additionally, as discussed above in Sections III.A and III.D.7, the 
Commission is modifying proposed Rule 17Ad-19 to include securities 
certificates that are disposed of in some way other than by destruction 
as, for example, by sale to collectors. The purpose of this 
modification is to make the rule complete with respect to all 
dispositions of cancelled securities certificates, but we believe that 
the number of certificates disposed of by transfer agents by means 
other than by destruction will be de minimis and will not affect the 
PRA numbers.

V. Costs and Benefits of Proposed Amendments

    The Commission has considered the costs and benefits of Rule 17Ad-
19 and the amendments to Rules 17f-1 and 17Ad-12. The Commission 
identified certain costs and benefits relating to the proposals, which 
are discussed below. We requested public comment in our Proposing 
Release. In particular, we requested comment on the potential costs for 
any necessary modifications to information gathering, management, and 
record-keeping systems or procedures, as well as any potential benefits 
resulting from the proposals for issuers, transfer agents, banks, 
brokers, regulators, or others.
    In general, the comment letters did not address costs or benefits 
in financial terms, and none provided cost or benefit data. One 
transfer agent, Otter Tail, commented that because of its small size it 
would be burdensome to witness the destruction of its cancelled 
certificates and to keep automated records of its cancelled 
certificates. This comment letter was discussed above in Section 
III.D.2, \59\ where we stated that it would be imprudent to exempt 
certain transfer agents from recordkeeping rules linked to antifraud 
rules simply because their volume of business is small. Additionally, 
Otter Tail has provided us with no financial or other information to 
support its claim that the new requirements would be unduly burdensome 
on itself or on other small transfer agents.
---------------------------------------------------------------------------

    \59\ See, supra, in text accompanying notes 48-50.
---------------------------------------------------------------------------

    To supplement our information on small transfer agents for cost and 
benefit purposes, Commission staff conducted a survey of six small 
transfer agents. Staff provided them with a written summary of the rule 
proposals and later contacted them by telephone to discuss in detail 
the costs and benefits of the proposals. The small transfer agents 
reported that, in general, they already were in compliance with the 
proposed rules. That is, they generally were already marking retired 
securities certificates with the word ``cancelled;'' they were already 
maintaining the certificates in a secure environment; and they were 
destroying the certificates on-premises and witnessing their 
destruction. All but one transfer agent reported that they already had 
their data on certificate cancellation and destruction available in 
electronically retrievable format, and the one remaining transfer agent 
said it had plans to modify its computer to provide such data. As 
discussed in the PRA analysis, the one item in the rule proposal that 
would generally involve an added expense is the requirement to draft 
``written procedures'' for processing cancelled securities. The 
transfer agents estimated that drafting written procedures would 
involve a one-time outlay of between 15 minutes and four hours, costs 
they variously estimated (based on the number of hours times their 
relevant expenses per hour) at between $15 and $500. Two of the small 
transfer agents suggested that it is the larger transfer agents that 
would tend to have problems with these rules because the large transfer 
agents are more apt to engage outside vendors for the transportation, 
warehousing, and destruction of cancelled certificates whereas the 
small transfer agents tend to perform these services within their own 
premises. One small transfer agent questioned the need for certain of 
the recordkeeping requirements, but another described the rule 
proposals as ``nice and clean, with no problems.''
    Commission staff also surveyed the Securities Transfer Association 
(``STA'') as a proxy for large transfer agents. The STA, at the staff's 
request, reviewed the rule proposals and later reported that its review 
had revealed ``no problems'' with the proposals and that it would not 
be submitting formal comments on the proposals. The STA advised that 
the large transfer agents are already in compliance with the rule 
proposals and that, in its opinion, the rule proposals in large part 
codify existing STA rules. As discussed in the PRA analysis, the STA 
further reported that the one new item in the rule proposals that would 
involve new costs is the requirement to have ``written procedures'' for 
cancellation procedures, which would take a large transfer agent about 
40 work hours to draft the procedures or about $3,000. The STA 
emphasized its view that most of the proposed rule changes are already 
in effect at transfer agents.

A. Benefits

    The new rule and rule amendments will provide specific benefits to 
U.S. investors, issuers, transfer agents, and other financial 
intermediaries. Some of these benefits are not readily quantifiable in 
terms of dollar value. However, the proposals are designed to reduce 
the fraudulent use of securities certificates, particularly cancelled 
certificates, by requiring improved safeguarding and recordkeeping by 
transfer agents. In recent years, the fraudulent resale and fraudulent 
collateralization of cancelled certificates (certificates with no 
investment value) cost private individuals and financial institutions 
many millions of dollars. We expect the costs of the described forms of 
certificate fraud on public investors and on market participants to be 
substantially reduced by the requirements related to adequate 
safeguarding, recordkeeping, and destruction procedures for these 
certificates by transfer agents.

B. Costs

    The rule changes require transfer agents to have written procedures 
for the cancellation, storage, transportation, destruction, or other 
disposition of retired securities certificates; to mark cancelled 
securities certificates as ``cancelled;'' to supervise, witness, and 
document the destruction of certificates; and to keep an easily 
retrievable record of each cancelled, destroyed, or otherwise disposed 
of certificate. The preparation of these written procedures required by 
the new rules will be a cost to transfer agents, and we have discussed 
the paperwork costs above in Section IV, estimating the combined total 
paperwork burden during the first year will be about 32,000 hours.
    Regarding the required use of the word ``cancelled'' on cancelled 
certificates, we reiterate that, with the encouragement of the STA's 
published

[[Page 74399]]

guidelines,\60\ most transfer agents already are marking their 
cancelled certificates with the word ``cancelled'' to designate their 
cancelled status.\61\ We believe the new requirement to use the word 
``cancelled'' to a large extent codifies existing business practices 
with little additional cost to the industry.
---------------------------------------------------------------------------

    \60\ Supra, note 17.
    \61\ We believe that most transfer agents are properly marking 
their retired certificates with the word ``cancelled,'' as STA has 
recommended. However, because doing so is not a Commission 
requirement, it currently is not a part of the Commission's 
examination module for transfer agents. Thus, we have no systematic 
data on the subject.
---------------------------------------------------------------------------

    As noted, the requirements to supervise, witness, and record the 
destruction of certificates and to keep easily retrievable records of 
the cancelled certificates will mean additional costs to some transfer 
agents. However, the additional costs are justified. As the Commission 
discussed above, its experience has been that securities certificates 
records that are not easily retrievable are not appropriate for 
investor protection, securities processing, or law enforcement 
purposes. In addition, the existing rules of the Exchange Act have 
since 1983 required registered transfer agents to maintain 
``appropriate certificate detail''\62\ for purposes of their master 
securityholder files concerning ``every security transferred, 
purchased, redeemed, or issued,''\63\ which includes records of 
cancelled certificates.\64\ These new requirements also will apply only 
on a going forward basis, i.e., no transfer agent will have to provide 
easily retrievable records for certificates cancelled prior to the 
Rule's effective date. Moreover, the newly-adopted recordkeeping 
requirements are consistent with good business practices, such as the 
STA guidelines.
---------------------------------------------------------------------------

    \62\ 17 CFR 240.17Ad-9(a). The existing requirements for 
``certificate detail'' include the certificate number, number of 
units, owner's name and address, the issue date, the cancellation 
date, etc.
    \63\ 17 CFR 240.17Ad-10(a).
    \64\ See 17 CFR 240.17Ad-6(c) and 240.17Ad-9(a).
---------------------------------------------------------------------------

VI. Consideration of the Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act requires the Commission, when 
engaged in rulemaking and required to consider whether an action is 
necessary or appropriate in the public interest, to consider whether 
the action would promote efficiency, competition, and capital 
formation.\65\ In adopting rules under the Exchange Act, Section 
23(a)(2) requires the Commission to consider the impact any rule would 
have on competition.\66\ Further, the law requires that the Commission 
not adopt any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the Exchange Act. We believe 
the new rule and amendments should improve market efficiency by 
reducing a source of fraud and its associated costs (i.e., the 
fraudulent introduction of cancelled and worthless securities into the 
marketplace). In addition, the new rule and amendments should have no 
material anticompetitive effects because they would apply equally to 
all transfer agents and should have no material effect on capital 
formation.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78c(f).
    \66\ 15 U.S.C. 78w.
---------------------------------------------------------------------------

VII. Summary of Final Regulatory Flexibility Analysis

    A Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act 
(``RFA'').\67\ This analysis relates to a rule and two rule amendments 
adopted under the Exchange Act that primarily address the processing of 
cancelled securities certificates by transfer agents. New Rule 17Ad-19 
under the Exchange Act requires every transfer agent to establish and 
implement written procedures for the cancellation, storage, 
transportation, destruction, or other disposition of securities 
certificates. The rule requires transfer agents to mark each cancelled 
securities certificate with the word ``cancelled;'' maintain a secure 
storage area for cancelled certificates; maintain an easily retrievable 
database of all of its cancelled certificates, including cancelled, 
destroyed, or otherwise disposed of certificates; and have specific 
procedures for the destruction of cancelled certificates. Additionally, 
the Commission has amended Rules 17f-1 (the lost and stolen securities 
rule) and 17Ad-12 (the transfer agent safekeeping rule) to make it 
clear that these rules apply to unissued and cancelled certificates.
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 601 et seq.
---------------------------------------------------------------------------

A. Need for Rule and Rule Amendments

    The rule and rule amendments address problems involving cancelled 
securities certificates. In particular, they address the problem that, 
until properly destroyed, or properly disposed of, cancelled securities 
certificates can resurface in the marketplace where they can and have 
been used to defraud public investors and financial institutions. The 
rule and rule amendments provide better procedures for processing and 
destroying cancelled certificates that will reduce this potential for 
harm.
    The case history of fraud involving cancelled certificates includes 
several major cases. In one case, approximately $111 billion of 
cancelled bond certificates were stolen after being delivered from a 
transfer agent's warehouse to a certificate destruction vendor. Many of 
these stolen certificates resurfaced worldwide where they were 
reintroduced into the marketplace or were used as loan collateral at 
financial institutions. In many cases, even security professionals were 
misled because the certificates appeared to be in pristine condition 
with little or no evidence of having been cancelled. While a number of 
trade practices have since been formulated by transfer agents to help 
address these problems, Commission rulemaking will require universal 
compliance among all transfer agents concerning the proper processing 
of cancelled certificates.

B. Significant Issues Raised by Public Comment

    One commenter, CTA, a trade association, suggested that Rule 17Ad-
19 should apply only to transfer agents that maintain securityholder 
records and suggested an exemption from the rule for transfer agents 
that act only for their own issuers (i.e., issuer-only transfer agents) 
and have average monthly volumes of 100 transfer items or less. Another 
commenter, Otter Tail Power Co., a transfer agent, noted that it 
processes less than 30 certificates per month and that maintaining 
retrievable records and witnessing the destruction of certificates 
would be unduly expensive.
    We note that Rule 17Ad-19 does, in fact, exempt certain registered 
transfer agents (about 100 out of a total transfer agent population of 
about 900) that do not maintain securityholder records. These are 
``named transfer agents'' that outsource their transfer agent functions 
to other transfer agents known as ``service company'' transfer 
agents.\68\ But we do not believe that the requirements of Rule 17Ad-
19, which deal with recordkeeping and the cancellation, storage, 
transportation, destruction, or other disposition of retired 
certificates, are inappropriately burdensome simply because the number 
of certificates that a transfer agent is processing or destroying is 
small. Even a small transfer agent can designate a person to destroy 
certificates under specific procedures. Moreover, we also believe that 
these limited burdens are justified by the rule's value as an

[[Page 74400]]

antifraud measure. We do not believe it would be prudent, especially in 
an antifraud provision, to establish different standards for transfer 
agents based on the number of certificates they process or the number 
of transfers they make within a given period, particularly when, as 
noted below in Section VII.C, approximately one-half of the transfer 
agents may be viewed as small entities. Considering that the underlying 
concern here is the protection of public investors from certificate 
fraud, we believe that the requirements of Rule 17Ad-19 are appropriate 
for all transfer agents that are in the business of processing 
securities certificates.
---------------------------------------------------------------------------

    \68\ 17 CFR 240.17Ad-9 (j)-(k).
---------------------------------------------------------------------------

C. Small Entities Subject to the Rule

    A transfer agent is a small entity if it: (1) Received less than 
500 items for transfer and less than 500 items for processing during 
the preceding six months (or in the time that it has been in business, 
if shorter); (2) transferred items only of issuers that would be deemed 
``small business'' or ``small organizations'' as defined in Exchange 
Act Rule 0-10; (3) maintained master shareholder files that in the 
aggregate contained less than 1,000 shareholder accounts or was the 
named transfer agent for less than 1,000 shareholder accounts at all 
times during the preceding fiscal year (or the time that it has been in 
business, if shorter); and (4) is not affiliated with any person (other 
than a natural person) that is not a small business or small 
organization under Exchange Act Rule 0-10.\69\ We note that 
approximately 470 registered transfer agents out of a population of 
about 900 apparently qualify as ``small entities'' for purposes of the 
RFA and will be subject to the requirements of Rule 17Ad-19.
---------------------------------------------------------------------------

    \69\ 17 CFR 240.0-10.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission summarized, and requested 
comment on, the Initial Regulatory Flexibility Analysis (``IRFA''). We 
did not receive any comments specifically responding to the IRFA. 
However, we did receive comments related to small business, which are 
summarized above in Section VII.B.

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    Rule 17Ad-19 requires all transfer agents to establish and 
implement written procedures for the cancellation, storage, 
transportation, destruction, or other disposition of securities 
certificates. Such written procedures and their implementation are 
subject to examination by each transfer agent's appropriate regulatory 
agency. Additionally, the amendments to Rules 17f-1 and 17Ad-12 clarify 
that these two rules apply broadly to securities certificates, 
including cancelled securities certificates.

E. Agency Action To Minimize Effect on Small Entities

    As required by Section 603 of the RFA, the Commission has 
considered the following alternatives to minimize impact of the 
proposed rules and rule amendments on small entities: (1) The 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the rules for small 
entities; (3) the use of performance rather than design standards; and 
(4) an exemption from coverage of the rule, or any part thereof, for 
small entities.\70\ As part of our consideration of the proposed rules, 
the staff conducted a survey of a few small transfer agents. The 
consensus among small transfer agents is that Rule 17Ad-19 will 
essentially codify their existing practices (based to some extent on 
trade association guidelines in effect since the mid-1990s) and will 
have minimal effect on them as transfer agents. We also considered 
alternatives that would exempt small transfer agents from some portions 
of the rule, but given that the rule is designed in large measure to 
protect public investors from certificate fraud, we do not believe a 
size exemption for transfer agents would be appropriate.
---------------------------------------------------------------------------

    \70\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The Commission has considered significant alternatives to the 
proposed rules that would adequately address the problem posed by 
cancelled securities certificates. The Commission believes that the 
establishment of different requirements for small entities is neither 
necessary nor practical because the proposal is designed to provide 
general standards that will protect the public and members of the 
financial community from certain types of securities fraud, and the 
proposal will include an exemption procedure that will be available to 
small entities on a case by case basis. Moreover, the FRFA concludes 
that the Commission believes that the proposal, if adopted, will not 
adversely affect small entities. Finally, the FRFA addresses each of 
the other requirements set forth under 5 U.S.C. 603. A copy of the FRFA 
may be obtained by contacting Jerry W. Carpenter or Thomas C. Etter, 
Jr., at (202) 942-0178, Division of Market Regulation, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-1001.

VIII. Statutory Basis and Text of Amendments

Statutory Basis

    Pursuant to the Securities Exchange Act of 1934 and particularly 
Sections 3(b), 17(a), 17(f)(1), 17A(d), and 23(a) thereof, 15 U.S.C. 
78q-1(d) and 78w(a), the Commission is adopting Sec.  240.17Ad-19 and 
amendments to Rules 17f-1, 17Ad-7, and 17Ad-12 of Title 17 of the Code 
of Federal Regulation in the manner set forth below.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements; Securities.

Text of Rules

0
In accordance with the foregoing, the Commission is amending part 240 
of chapter II of title 17 of the Code of Federal Regulations as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for Part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, 7202, 7241, 7262, and 7263; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *


0
2. Section 240.17f-1 is amended by:
0
a. Adding paragraphs (a)(6), (a)(7) and (a)(8);
0
b. Revising the phrase ``lost in transit'' to read ``lost, missing, or 
stolen while in transit'' in paragraph (c)(2)(i);
0
c. Redesignating paragraphs (c)(2)(ii) and (c)(2)(iii) as paragraphs 
(c)(2)(iii) and (c)(2)(iv) respectively;
0
d. Adding new paragraph (c)(2)(ii); and
0
e. Adding paragraph (d)(3) to read as follows:


Sec.  240.17f-1  Requirements for reporting and inquiry with respect to 
missing, lost, counterfeit or stolen securities.

    (a) * * *
    (6) The term securities certificate means any physical instrument 
that represents or purports to represent ownership in a security that 
was printed by or on behalf of the issuer thereof and shall include any 
such instrument that is or was:
    (i) Printed but not issued;
    (ii) Issued and outstanding, including treasury securities;

[[Page 74401]]

    (iii) Cancelled, which for this purpose means either or both of the 
procedures set forth in Sec.  240.17Ad-19(a)(1); or
    (iv) Counterfeit or reasonably believed to be counterfeit.
    (7) The term issuer shall include an issuer's:
    (i) Transfer agent(s), paying agent(s), tender agent(s), and 
person(s) providing similar services; and
    (ii) Corporate predecessor(s) and successor(s).
    (8) The term missing shall include any securities certificate that:
    (i) Cannot be located or accounted for, but is not believed to be 
lost or stolen; or
    (ii) A transfer agent claims or believes was destroyed in any 
manner other than by the transfer agent's own certificate destruction 
procedures as provided in Sec.  240.17Ad-19.
* * * * *
    (c) * * *
    (2) * * *
    (ii) Where a shipment of retired securities certificates is in 
transit between any transfer agents, banks, brokers, dealers, or other 
reporting institutions, with no affiliation existing between such 
entities, and the delivering institution fails to receive notice of 
receipt or non-receipt of the certificates, the delivering institution 
shall act to determine the facts. In the event of non-delivery where 
the certificates are not recovered by the delivering institution, the 
delivering institution shall report the certificates as lost, stolen, 
or missing to the Commission or its designee within a reasonable time 
under the circumstances but in any event within twenty business days 
from the date of shipment.
* * * * *
    (d) * * *
    (3) A reporting institution shall make required inquiries by the 
end of the fifth business day after a securities certificate comes into 
its possession or keeping, provided that such inquiries shall be made 
before the certificate is sold, used as collateral, or sent to another 
reporting institution.
* * * * *


Sec.  240.17Ad-7  [Amended]

0
3. Section 240.17Ad-7, paragraph (i), is amended by revising the phrase 
``Sec.  240.17Ad-17(c)'' to read ``Sec. Sec.  240.17Ad-17(c) and 
240.17Ad-19(c)''.


0
4. Amend Sec.  240.17Ad-12, paragraph (a)(1), by revising the phrase 
``risk of destruction, theft or other loss;'' to read ``risk of theft, 
loss or destruction (other than by a transfer agent's certificate 
destruction procedures pursuant to Sec.  240.17Ad-19);'' and adding 
paragraph (b) to read as follows:


Sec.  240.17Ad-12  Safeguarding of funds and securities.

* * * * *
    (b) For purposes of this section, the term securities shall have 
the same meaning as the term securities certificate as defined in Sec.  
240.17f-1(a)(6).


0
5. Section 240.17Ad-19 is added to read as follows:


Sec.  240.17Ad-19  Requirements for cancellation, processing, storage, 
transportation, and destruction or other disposition of securities 
certificates.

    (a) Definitions. For purposes of this section:
    (1) The terms cancelled or cancellation means the process in which 
a securities certificate:
    (i) Is physically marked to clearly indicate that it no longer 
represents a claim against the issuer; and
    (ii) Is voided on the records of the transfer agent.
    (2) The term cancelled certificate facility means any location 
where securities certificates are cancelled and thereafter processed, 
stored, transported, destroyed or otherwise disposed of.
    (3) The term certificate number means a unique identification or 
serial number that is assigned and affixed by an issuer or transfer 
agent to each securities certificate.
    (4) The term controlled access means the practice of permitting the 
entry of only authorized personnel to areas where securities 
certificates are cancelled and thereafter processed, stored, 
transported, destroyed or otherwise disposed of.
    (5) The term CUSIP number means the unique identification number 
that is assigned to each securities issue.
    (6) The term destruction means the physical ruination of a 
securities certificate by a transfer agent as part of the certificate 
destruction procedures that make the reconstruction of the certificate 
impossible.
    (7) The term otherwise disposed of means any disposition other than 
by destruction.
    (8) The term securities certificate has the same meaning that it 
has in Sec.  240.17f-1(a)(6).
    (b) Required procedures for the cancellation, storage, 
transportation, destruction, or other disposition of securities 
certificates. Every transfer agent involved in the handling, 
processing, or storage of securities certificates shall establish and 
implement written procedures for the cancellation, storage, 
transportation, destruction, or other disposition of securities 
certificates. This requirement applies to any agent that the transfer 
agent uses to perform any of these activities.
    (c) Written procedures. The written procedures required by 
paragraph (b) of this section at a minimum shall provide that:
    (1) There is controlled access to any cancelled certificate 
facility;
    (2) Each cancelled certificate be marked with the word 
``CANCELLED'' by stamp or perforation on the face of the certificate 
unless the transfer agent has procedures adopted pursuant to this rule 
for the destruction of cancelled certificates within three business 
days of their cancellation;
    (3) A record that is indexed and retrievable by CUSIP and 
certificate number that contains the CUSIP number, certificate number 
with any prefix or suffix, denomination, registration, issue date, and 
cancellation date of each cancelled certificate;
    (4) A record that is indexed and retrievable by CUSIP and 
certificate number of each destroyed securities certificate or 
securities certificate otherwise disposed of, the records must contain 
for each destroyed or otherwise disposed of certificate the CUSIP 
number, certificate number with any prefix or suffix, denomination, 
registration, issue date, and cancellation date, and additionally for 
any certificate otherwise disposed of a record of how it was disposed 
of, the name and address of the party to whom it was disposed, and the 
date of disposition;
    (5) The physical transportation of cancelled certificates be made 
in a secure manner and that the transfer agent maintain separately a 
record of the CUSIP number and certificate number of each certificate 
in transit;
    (6) Authorized personnel of the transfer agent or its designee 
supervise and witness the intentional destruction of any cancelled 
certificate and retain copies of all records relating to certificates 
which were destroyed; and
    (7) Reports to the Lost and Stolen Securities Program be effected 
in a timely and complete manner, as provided in Sec.  240.17f-1 of any 
cancelled certificate that is lost, stolen, missing, or counterfeit.
    (d) Recordkeeping. Every transfer agent subject to this section 
shall maintain records that demonstrate compliance with the 
requirements set forth in this section and that describe the transfer 
agent's methodology for complying with this section for three

[[Page 74402]]

years, the first year in an easily accessible place.
    (e) Exemptive authority. Upon written application or upon its own 
motion, the Commission may grant an exemption from any of the 
provisions of this section, either unconditionally or on specific terms 
and conditions, to any transfer agent or any class of transfer agents 
and to any securities certificate or any class of securities 
certificates.

    Dated: December 16, 2003.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-31450 Filed 12-22-03; 8:45 am]
BILLING CODE 8010-01-P