[Federal Register Volume 69, Number 129 (Wednesday, July 7, 2004)]
[Notices]
[Pages 41003-41005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15285]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49930; File No. SR-DTC-2003-09]


Self-Regulatory Organizations; The Depository Trust Company; 
Order Granting Approval of a Proposed Rule Change Relating to 
Establishing a New Service To Destroy Certain Certificates

June 28, 2004.

I. Introduction

    On June 12, 2003, The Depository Trust Company (``DTC'') filed with 
the Securities and Exchange Commission (``Commission'') a proposed rule 
change SR-DTC-2003-03 pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ Notice of the proposal was published 
in the Federal Register on January 23, 2004.\2\ The Commission received 
ten comment letters, which are discussed in Section III. For the 
reasons discussed below, the Commission is approving the proposed rule 
change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 49080 (January 14, 
2004), 69 FR 3405.
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II. Description

    DTC filed this proposed rule change to establish a new service, 
which DTC calls the Destruction of Non-Transferable Securities 
Certificate Program. The new service will allow DTC to destroy certain 
certificates that represent positions in securities for which transfer 
agent services are not available and have not been available for six 
years or longer. DTC notes that the issuers of the securities in 
question are often inactive or insolvent and that the lack of transfer 
agent services generally renders the certificates non-transferable. The 
new service will reduce DTC's custodial expenses for such non-
transferable securities and will allow participants to avoid certain 
fees to which they would otherwise be subject for the ongoing custody 
of the non-transferable issues. The filing also was to implement a DTC 
fee increase relating to DTC's custody of such non-transferable 
securities that are not designated for destruction by DTC participants, 
but as noted below the fee increase was implemented in a separate 
filing on December 23, 2003.
    (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. Because significant costs and risks are 
associated with ongoing maintenance of custody, control, and audit of 
certificates, certificate reduction reduces DTC's costs and risks. As a 
result of these efforts, DTC has significantly reduced the number of 
corporate, municipal, and bearer certificates it holds.
    At the same time, however, the number and percentage of 
certificates held in DTC's vaults that represent securities for which 
transfer agent services are not available has grown considerably. DTC 
refers to these certificates as ``non-transferable securities 
certificates.'' Typically, they are equity securities of a company that 
has become inactive or insolvent. Currently, DTC holds approximately 
1.2 million such certificates, representing nearly 22% of its entire 
certificate inventory.
    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.
    (2) Previous Commission Orders Approving Certificate Destruction. 
DTC has twice in the past adopted programs pursuant to which it 
destroys certificates. The Commission approved DTC programs to destroy 
certificates representing (1) worthless warrants, rights, and put 
options whose expiration dates have passed \3\ and (2) matured

[[Page 41004]]

book-entry-only debt.\4\ During 2003, DTC destroyed a total of 35,652 
certificates pursuant to these two programs.
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    \3\ Securities Exchange Act Release No. 28642 (November 21, 
1990), 55 FR 49725 [File No. SR-DTC-90-11].
    \4\ Securities Exchange Act Release No. 44169 (April 10, 2001), 
66 FR 19592 [File No. SR-DTC-99-6].
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    (3) PREM. Many participants currently use DTC's Position Removal 
(``PREM'') function to remove positions in non-transferable securities 
certificates from their participant accounts. Currently, those 
positions are moved to a DTC internal PREM account. However, the 
certificates representing those positions are still held in DTC's 
vaults with all the costs and risks associated with storing such 
certificates, maintaining the related accounts, and monitoring the 
status of such issues.
    (4) Modifying the PREM Process. Prior to this rule change, the only 
effects of a participant's ``deleting'' its position in an issue using 
PREM were to eliminate: (1) The custody fees associated with the 
position and (2) the reporting of the position on the participant's 
securities position listing statements. Under the new program, DTC will 
notify its participants that using PREM to remove a position from its 
participant account or maintaining a position in PREM constitutes an 
acknowledgement by the participant that not only may DTC cease 
crediting the security to the participant's securities account, it may 
at its option based upon PREM criteria include the certificates 
representing the position in DTC's Destruction of Non-Transferable 
Securities Certificate Program. DTC will implement this new program 
with issues in which all participant positions have been moved to 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 their destruction the certificates will be 
computer imaged by DTC. For all destroyed certificates, DTC will 
maintain an accurate record that will be searchable both 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 for at least six 
years. For at least the first six months after destruction the computer 
images will be kept in a place that is easily accessible by authorized 
DTC personnel. Such records will be: (1) Available at all times for 
examination by the Commission or other appropriate regulatory agency in 
an easily readable projection enlargement; (2) immediately provided 
upon request by the Commission or other appropriate regulatory agency; 
(3) arranged and indexed in a manner that permits immediate location of 
any particular record; and (4) copied and stored separately from any 
original records.
    Participants will be relieved of future DTC fees for any positions 
that the participant moves to PREM. If at a later 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 have the destroyed certificates replaced 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 custody fee which is described 
below. DTC will attempt to honor the participants' requests 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 
increased its monthly charge for each position of a security that has 
been non-transferable for six or more years and that is not in PREM 
from $.17 to $1.00 per position per month in such issues (in addition 
to any other applicable fees) on December 23, 2003.\5\ DTC anticipates 
that it will increase the fee on January 1, 2005, to $5.00 per position 
per month in such issues.\6\ Currently, about 93% of all DTC non-
transferable securities certificates are in PREM.
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    \5\ 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. Securities Exchange Act Release No. 
49100 January 20, 2004), 69 FR 3959 (January 27, 2004) [File No. SR-
DTC-2003-15].
    \6\ As required by Section 19(b) of the Act, DTC will file any 
proposed fee change with the Commission.
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    (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.
    As further benefits, DTC believes that this new program will reduce 
both DTC's and overall industry expenses as follows: First, the program 
will eliminate the costs and risks associated with the ongoing 
maintenance of custody, control, insurance protection, and audit of 
these 1.2 million certificates. Second, DTC's destruction of such 
certificates on a centralized basis will provide the industry with 
scale economies for the destruction process.
    DTC reports that it solicited comments from all DTC participants 
concerning the program through a DTC Important Notice dated January 22, 
2003, a copy of which is attached to the DTC filing. In addition, DTC 
worked with the Securities Industry Association's Securities Operations 
Division's Regulatory and Clearance Committee and with DTC's Securities 
Processing Advisory Board. DTC reports that 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. Comments

    Ten commenters, consisting of five broker-dealers, four trade 
associations in the securities industry, and one self-regulatory 
organization submitted comment letters to the Commission on this 
proposal.\7\ All ten letters endorsed

[[Page 41005]]

DTC's proposal, stating generally that the destruction of the non-
transferable securities certificates would promote efficiency and would 
reduce expenses within the securities industry.\8\
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    \7\ The commenters were: Phil Lanz, Managing Director, Bear, 
Stearns Securities Corp. (February 4, 2004); Robert D. Becker, 
Chairperson, Bank Depository User Group (February 1, 2004); John 
Cusumano, President, Customer Account Transfer Division, Inc. 
(February 11, 2004); Ralph Guzman, Senior Vice President, National 
Investor Services Corp. (February 6, 2004); Kristin Johnson, 
Operations Division, Edward Jones (February 9, 2004); Brian 
Urkowitz, First Vice President, Merrill Lynch (February 13, 2004); 
Frank M. Ciavarella, Cashiers' Division, Wachovia Securities 
(February 12, 2004); Edward Hazel, Securities Operations Division, 
Securities Industries Association (February 6, 2004); Thomas Davis, 
Morgan Stanley (received March 1, 2004); and Jack R. Weiner, 
Managing Director & Deputy General Counsel, DTC (June 2, 2004).
    \8\ One commenter, Wachovia Securities, while supportive of 
DTC's proposal, appeared to raise the issue of the possibility of 
non-transferable securities certificates returning to circulation in 
the marketplace. In response, DTC submitted a comment letter stating 
that it had contacted the commenter to discuss the commenter's issue 
and that the commenter was supportive of the proposal and that the 
Commission should move forward with approving the proposal.
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IV. Discussion

    We note that Section 17A(b)(3)(F) of the Act requires, among other 
things, that the rules of a clearing agency be designed to assure the 
safeguarding of funds and securities which are in its custody or 
control or for which it is responsible.\9\ In Section 17A(a)(1)(B) of 
the Act, Congress stated its finding that inefficient procedures for 
clearance and settlement imposed unnecessary costs on public 
investors.\10\ Section 17(a) of the Act and Rule 17a-1 thereunder 
provides that a registered clearing agency must maintain certain 
records for a period of five years.\11\ (The Commission has previously 
taken the position that Rule 17a-1 includes records pertaining to 
worthless securities certificates.)\12\
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    \9\ 15 U.S.C. 78q-1(b)(3)(A).
    \10\ 15 U.S.C. 78q-1(a)(1)(B).
    \11\ 15 U.S.C. 78q(a); 17 CFR 240.17a-1.
    \12\ Supra note 3.
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    DTC correctly stated in its rule proposal that the Commission has 
twice approved DTC programs that authorized DTC to destroy certain 
securities certificates. In 1990, the Commission approved a proposed 
rule change enabling DTC to destroy certificates representing expired 
and worthless warrants, rights, and put options, provided DTC 
maintained copies of such certificates for seven years after their 
destruction.\13\ In 2001, the Commission approved a DTC proposed rule 
change that authorized DTC to destroy matured book-entry only (``BEO'') 
debt securities certificates, together with their related DTC letters 
of transmittal and DTC redemption summary payment forms, provided that 
DTC maintain microfilm or computer images of these BEO certificates and 
related paperwork for ten years following their destruction.\14\ In 
both cases, the Commission indicated that it favored the efficiencies 
involved in eliminating custodial services for certain categories of 
worthless securities certificates provided there are proper disposal 
procedures in place and proper records being maintained of the 
destroyed certificates.
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    \13\ Supra note 3.
    \14\ Supra note 4.
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    We note that DTC's new program provides that: (1) The securities 
certificates in question must have been held by DTC in non-transferable 
status for at least six years before DTC may destroy them and (2) DTC 
will maintain electronic images of the destroyed certificates for at 
least six years after the certificates are destroyed. Thus, for 
recordkeeping purposes, the certificates will be available either in 
original form or in imaged form for two consecutive periods of not less 
than six years, a total of not less than 12 years.\15\
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    \15\ See also Rules 17Ad-6(c) and 17Ad-7(d) under the Act, 
whereby transfer agents are required to maintain cancelled 
certificates for ``not less than six years.'' 17 CFR 240.17Ad-6(c) 
and 17Ad-7(d).
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    In this case, we believe that the protections required by Section 
17A(b)(3)(F) and goals set forth in Section 17A(a)(1)(B) of the Act and 
other applicable provisions are met by DTC's proposal. The new DTC 
program provides for: (1) Secure certificate disposal procedures that 
will be overseen and witnessed by DTC personnel and (2) appropriate 
certificate imaging and recordkeeping.

V. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
in particular with the requirements of Section 17A of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-DTC-2003-09) be and hereby 
is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15285 Filed 7-6-04; 8:45 am]
BILLING CODE 8010-01-P