[Federal Register Volume 69, Number 15 (Friday, January 23, 2004)]
[Notices]
[Pages 3405-3406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1460]



[[Page 3405]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49080; File No. SR-DTC-2003-09]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Proposed Rule Change To Establish a New Service To 
Destroy Certain Certificates and To Implement a Fee for Custody of 
Certain Certificates Not To Be Destroyed

January 14, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ 15 U.S.C. 78s(b)(1), notice is hereby given that on June 
12, 2003, The Depository Trust Company (``DTC'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change (File No. SR-DTC-2003-09) as described in Items I, II, and III 
below, which Items have been prepared primarily by DTC. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC is filing this proposed rule change to establish a new service 
that will allow DTC to destroy certain certificates representing 
position in securities for which transfer agent services have not been 
available for a period of time. The filing is also being made to 
implement a fee relating to custody of certificates in such issues that 
are not designated for destruction by DTC participants.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, DTC included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. DTC has prepared summaries, set forth in sections (A), 
(B), and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    This proposed new DTC service will allow DTC to destroy certain 
certificates representing position in securities for which transfer 
agent services are no longer available. This will allow participants to 
avoid fees to which they would otherwise be subject relating to DTC's 
ongoing custody of such issues.
    (1) Background. Over the years, DTC has moved aggressively to 
reduce the number of securities certificates held in its vaults, 
principally through expansion of the Book-Entry-Only (BEO) program, 
bearer-to-registered conversions, and Fast Automated Securities 
Transfer (FAST) program. These efforts have been spurred by the desire 
of the industry and regulators to move towards a book-entry or 
dematerialized environment. Certificate reduction reduces risk and 
cost. As a result of these efforts, DTC has significantly reduced the 
number of corporate, municipal, and bearer certificates held by DTC.
    At the same time, however, the number and percentage of 
certificates held in the depository's vaults representing securities 
for which transfer agent services are not available has grown 
considerably. (These certificates are referred to in this filing as 
``non-transferable securities certificates.'') Typically, these are 
equity securities of a company that has become inactive or insolvent. 
Today, DTC holds 1.2 million such certificates, representing nearly 22% 
of the depository's entire certificate inventory. Significant risks and 
costs are associated with the ongoing maintenance of custody, control, 
and audit of these certificates.
    To address the costs and risks presented by the rising inventory of 
non-transferable certificates, DTC, having considered helpful input 
provided by many participants and industry groups, has developed its 
Destruction of Non-Transferable Securities Certificates program, which 
is the subject of this filing.
    (2) Previous SEC Orders Approving Certificate Destruction. DTC has 
twice in the past adopted programs pursuant to which it destroys 
certificates. The SEC has approved DTC programs to destroy certificates 
representing worthless warrants, rights, and put options whose 
expiration dates have passed \2\ to destroy matured book-entry-only 
debt certificates.\3\ DTC destroyed 5,652 certificates in the first 
half of 2003 pursuant to these programs.
---------------------------------------------------------------------------

    \2\ Securities Exchange Act Release No. 28642 (November 21, 
1990), 55 FR 49725 [File No. SR-DTC-90-11].
    \3\ Securities Exchange Act Release No. 44169 (April 10, 2001), 
66 FR 19592 [File No. SR-DTC-99-6].
---------------------------------------------------------------------------

    (3) PREM. Many participants currently use DTC's Position Removal 
(PREM) function to delete positions in issues of non-transferable 
securities certificates from their participant accounts. Today, those 
positions are then moved to a DTC internal PREM account. However, the 
certificates representing those positions are still held in DTC's 
vaults with all the risks and costs associated with storing such 
certificates, maintaining the related accounts, and monitoring the 
status of such issues.
    (4) Modifying the PREM Process. Under today's process, the only 
effects of a participant's ``deleting'' its position in an issue using 
PREM are to eliminate the custody fees associated with the position and 
to eliminate the reflection of the position on the participant's 
securities position listing statements. Under the proposed program, DTC 
will notify its participants that using PREM to delete a position or 
leaving a position in PREM constitutes an acknowledgement by the 
participant that DTC may cease crediting the security to the 
participant's securities account and that DTC may at its option based 
upon PREM criteria include the certificates representing the position 
in its certificate destruction program. Upon receipt of Commission 
approval, DTC will implement the program beginning first with issues in 
which all participant positions have been put in PREM.
    (5) Destruction Process. Authorized DTC personnel will oversee and 
witness the destruction of the certificates. DTC will maintain detailed 
ledger control over the certificates through the point of destruction. 
In addition, prior to destruction the certificates will be computer 
imaged by DTC. An accurate record of all certificates will be 
maintained. The record will be searchable by certificate number and by 
date of destruction. DTC will retain copies of the computer images of 
these certificates and of related positional information following 
destruction of the certificates. The images will be kept for at least 
six years and will be kept for the first six months in a place that is 
easily accessible by authorized DTC personnel. Such records will be: 
(i) Available at all times for examination by the Commission or other 
appropriate regulatory agency in an easily readable projection 
enlargement; (ii) arranged and indexed in a manner that permits 
immediate location of any particular record; (iii) immediately provided 
upon request by the Commission or other appropriate regulatory agency; 
and (iv) copied and stored separately from the original records.
    Participants will be relieved of future DTC fees for any positions 
that the participant moves to PREM. If at a later

[[Page 3406]]

date and in the unlikely event that transfer agent services are resumed 
for a security issue where the depository has already destroyed 
certificates, DTC will use its best efforts to replace the destroyed 
certificates and to return the position to the appropriate 
participants.
    (6) Withdrawing Certificates. Alternatively, a participant may wish 
to withdraw its position in an issue of non-transferable securities 
certificates that is subjected to the fee which is described below. DTC 
will attempt to honor the request for participants if certificates in 
proper denominations are available in DTC's inventory. If proper 
denominations are not available, which as a practical matter may 
typically be the case, DTC will hold a certificate of greater value 
than that represented by the participant's long position and will 
charge the participant fees as described below.
    (7) Checking for Issues of Non-Transferable Securities 
Certificates. Participants can systemically identify issues of non-
transferable securities certificates by accessing either the Corporate 
and Municipal Eligible Security Files or the Corporate and Municipal 
Change Files. If appropriate, participants can then move their 
positions in any such issues to PREM and avoid the fees associated with 
the continued custody of the positions. Participants can also 
subsequently elect to deposit into DTC additional certificates of non-
transferable securities issues and then move them to PREM so that they 
may be destroyed.
    (8) Fee. Since much of DTC's cost to custody certificates is now 
directly attributable to non-transferable securities certificates, DTC 
will increase its monthly charge (in addition to all other applicable 
fees) for each position of a security that has been non-transferable 
for six or more years and that is not in PREM. This fee will increase 
from $.17 to $1.00 per position per month in such issues (in addition 
to any other applicable fees).\4\ DTC anticipates that the fee will 
increase on January 1, 2005, to $5.00 per position per month in such 
issues. Today, 93% of all non-transferable securities certificates are 
in PREM.
---------------------------------------------------------------------------

    \4\ The fee of $1.00 per position was filed with the Commission 
under Section 19(b)(3)(A) of the Act on December 29, 2003, and as 
such was effective when filed (File No. SR-DTC-2003-15).
---------------------------------------------------------------------------

    (9) The Benefits. As a result of this new procedure, DTC will 
provide uniform and consistent controls and procedures (as well as 
physical safeguards) for issues of non-transferable securities.
    DTC believes that this new service will also reduce both DTC 
expenses and overall industry costs. DTC will eliminate the cost of 
custodying and handling such securities and the associated insurance 
costs. In addition, DTC's destruction of such certificates on a 
centralized basis will provide the industry with scale economies for 
this process. Finally, this will allow DTC to reduce the risks 
associated with the ongoing maintenance of custody, control, and audit 
of these 1.2 million certificates.
    DTC believes that the proposed rule change is consistent with the 
requirements of section 17A of the Act \5\ and the rules and 
regulations thereunder applicable to DTC because it will permit DTC and 
its participants by ensuring that DTC can improve the efficiency of its 
operations.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78q-1.
---------------------------------------------------------------------------

(B) Self-Regulatory Organization's Statement on Burden on Competition

    DTC does not believe that the proposed rule change will impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, in the public interest, and for 
the protection of investors.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants or Others

    DTC solicited comments from all DTC participants concerning the 
program through an Important Notice dated January 22, 2003. A copy of 
the DTC Important Notice is attached as Exhibit B to its proposed rule 
change. In addition, DTC worked with the Securities Industry 
Association Securities Operations Division's Regulatory and Clearance 
Committee and DTC's Securities Processing Advisory Board. Feedback from 
participants and from such industry groups, while generally positive 
and supportive, also led DTC to refine the proposal by extending the 
time period during which the securities must be in non-transferable 
status before they can be destroyed (i.e., six years) and by extending 
the timing of the implementation of the related fee.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within thirty-five days of the date of publication of this notice 
in the Federal Register, or within such longer period: (i) As the 
Commission may designate up to ninety days of such date if it finds 
such longer period to be appropriate and publishes its reasons for so 
finding, or (ii) as to which DTC consents, the Commission will:
    (i) By order approve such proposed rule change or
    (ii) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comments should refer to File No. SR-DTC-
2003-09. This file number should be included on the subject line if e-
mail is used. To help the Commission process and review your comments 
more effectively, comments should be sent in hardcopy or by e-mail but 
not by both methods. Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, at the address above.
    Copies of such filing will also be available for inspection and 
copying at the principal office of DTC and on DTC's Web site at 
DTCC.com. All submissions should refer to the file Number SR-DTC-2003-
09 and should be submitted by February 13, 2004.

    For the Commission by the Division of Market Regulation, pursuant 
to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1460 Filed 1-22-04; 8:45 am]
BILLING CODE 8010-01-P