[Federal Register Volume 73, Number 40 (Thursday, February 28, 2008)]
[Notices]
[Pages 10849-10852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-3730]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-57362; File No. SR-DTC-2006-16]


Self-Regulatory Organizations; The Depository Trust Company; 
Notice of Filing of Amended Proposed Rule Change Amending FAST and DRS 
Limited Participant Requirements for Transfer Agents

February 20, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 12, 2006, The 
Depository Trust Company (``DTC'') filed with the Securities and 
Exchange Commission (``Commission'') and on March 29, 2007, and May 3, 
2007, amended proposed rule change No. SR-DTC-2006-16. On May 25, 2007, 
the Commission published notice of the proposed rule change as amended 
by Amendment 1 and Amendment 2.\2\ The Commission received 29 comment 
letters to the proposed rule change as amended by Amendments 1 and 
2.\3\ On December 31, 2007, DTC filed Amendment 3. The Commission is 
publishing this notice to solicit comments from interested parties on 
the proposed rule change as amended by Amendments 1, 2, and 3 and as 
described in Items I, II, and III below, which items have been prepared 
primarily by the DTC.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 34-55816 (May 25, 2007), 
71 FR 30648 (June 1, 2007)[File No. SR-DTC-16].
    \3\ The comment letters can be found at http://www.sec.gov/comments/sr-dtc-2006-16/dtc200616.shtml.
    \4\ The exact text of the DTC's proposed rule change can be 
found at http://www.dtc.org/impNtc/mor/index.html#2006.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    DTC proposes to amend its rules to update, standardize, and restate 
the requirements for the Fast Automated Securities Transfer Program 
(``FAST''), to delineate the responsibilities of DTC and the transfer 
agents with respect to the securities held by transfer agents as part 
of the FAST program, and to restate the requirements for transfer 
agents participating in the Direct Registration System (``DRS'').

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

    In its filing with the Commission, the 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 these 
statements.\5\
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    \5\ The Commission has modified portions of the text of the 
summaries prepared by the DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    Prior to the establishment of the FAST program, transfers of 
securities to or from DTC occurred by sending securities back and forth 
between DTC and transfer agents. In the case of securities being 
deposited with DTC, DTC sent the certificates to the transfer agent for 
registration into the name of DTC's nominee, Cede & Co., and the 
transfer agent returned the reregistered certificates to DTC. In the 
case of securities being withdrawn from DTC, DTC sent the certificates 
registered in the name of Cede & Co. to the transfer agent for 
reregistration into the name designated by the withdrawing DTC 
participant, and the transfer agent returned the reregistered security 
to DTC for delivery to the withdrawing participant. This process 
exposed securities to risk of loss during transit between DTC and 
transfer agents and resulted in the expense of making physical 
deliveries of securities.
    Under the FAST program, transfer agents hold FAST-eligible 
securities registered in the name of Cede & Co. in the form of balance 
certificates. As additional securities are deposited or withdrawn from 
DTC, transfer agents adjust the denomination of the balance 
certificates as appropriate and electronically confirm theses changes 
with DTC. Such ``FAST agents'' are holding in custody those securities 
that would otherwise be held at DTC for the benefit of DTC's 
participants. As such, the FAST program reduces the movement of 
certificates between DTC and the transfer agents and therefore reduces 
the costs and risks associated with the creation, movement, and storing 
of certificates to DTC, DTC participants, issuers, and transfer 
agents.\6\
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    \6\ For a description of DTC's current rules relating to FAST, 
see Securities Exchange Act Release Nos. 34-13342 (March 8, 1977) 
[File No. SR-DTC-76-3]; 34-14997 (July 26, 1978) [File No. SR-DTC-
78-11]; 34-21401 (October 16, 1984) [File No. SR-DTC-84-8]; 34-31941 
(March 3, 1993) [SR-DTC-92-15]; and 34-46956 (December 6, 2002) 
[File No. SR-DTC-2002-15].
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    The FAST program has grown substantially since first being 
introduced in 1975.\7\ Recent changes in the rules of the major 
securities exchanges are expected to further accelerate this growth.\8\ 
Those exchange rules require as a listing prerequisite that issues be 
eligible for processing through DRS. Since becoming a FAST agent is a 
criterion for a transfer agent's eligibility for participation in DRS, 
DTC

[[Page 10850]]

anticipates significant growth in the FAST program.
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    \7\ DTC introduced the FAST program in 1975 with 400 issues and 
10 agents. Currently, there are over 930,000 issues and 
approximately 90 agents in FAST.
    \8\ Securities Exchange Act Release Nos. 54289 (August 8, 2006), 
71 FR 47278 (August 16, 2006) [File No. SR-NYSE-2006-29]; 54290 
(August 8, 2006), 71 FR 47262 (August 16, 2006) [File No. SR-Amex-
2006-40]; 54288 (August 8, 2006), 71 FR 47276 (August 16, 2006) 
[File No. SR-NASDAQ-2006-08]; 54410 (September 7, 2006), 71 FR 54316 
(September 14, 2006) [File No. SR-NYSE Arca-2006-31]; 55482 (March 
15, 2007), 72 FR 13544 (March 22, 2007) [File No. SR-Phlx-2006-69]; 
55481 (March 15, 2007), 72 FR 13544 (March 22, 2007) [File No. SR-
CHX-2006-33]; and 55480 (March 15, 2007), 72 FR 13544 (March 22, 
2007) [File No. SR-BSE-2006-46].
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    DRS allows an investors to hold a security as the registered owner 
in electronic form on the books of the transfer agent rather than 
holding through the use of a certificate or holding indirectly through 
a financial intermediary (e.g., a broker-dealer) that holds the 
security in ``street name''. DRS also allows for the transfer of a DRS 
position from the books of the transfer agent to a DTC broker-dealer 
participant through the facilities of DTC using FAST.\9\
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    \9\ For a description of DTC's rules relating to DRS, see 
Securities Exchange Act Release Nos. 34-37931 (November 7, 1996) 
[File No. SR-DTC-96-15]; 34-41862 (September 10, 1999) [File No. SR-
DTC-99-16]; 34-42366 (January 28, 2000) [File No. SR-DTC-00-01]; 34-
42704 (April 19, 2000) [File No. SR-DTC-00-04]; 34-43586 (November 
17, 2000) [File No. SR-DTC-00-09]; 34-44969 (August 14, 2001) [File 
No. SR-DTC-2001-07]; 34-45232 (January 3, 2002) [SR-DTC-2001-18]; 
34-45430 (February 11, 2002) [File No. SR-DTC-2002-01]; and 34-48885 
(December 5, 2003) [File No. SR-DTC-2002-17]; 34-52422 (September 
14, 2005) [File No. SR-DTC-2005-11].
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(1) Proposed Amendments to DTC's FAST Requirements
    Despite the FAST program's robust past growth and expected future 
growth, the transfer agent eligibility requirements for FAST have not 
substantially changed since the implementation of FAST and do not: (i) 
Take into account the increased volume and value of securities 
processed by the transfer agents, (ii) reflect improved technology and 
currently available safeguards which would enhance the safekeeping of 
securities held by the transfer agents on behalf of DTC , and (iii) 
require the use of standardized audit reports to certify transfer 
agents' processes and controls.
    In light of the FAST program's growth, DTC reexamined the 
requirements of the FAST program with a view toward ensuring that DTC's 
assets in the custody of transfer agents, which ultimately belong to 
DTC's participants and their customers, are adequately protected. As 
more fully described below, DTC has identified aspects of the FAST 
program that need revising or additional requirements. The proposed 
revisions and additional requirements include: (i) Insurance 
requirements that take into account transaction volumes of securities 
processed by transfer agents, (ii) safekeeping requirements to clarify 
and to enhance security and fire protection standards and to take into 
consideration technological advances that allow for economical security 
improvements, and (iii) bookkeeping requirements to ensure compliance 
with applicable laws and regulations and use standardized audit reports 
addressing transfer agents' processes and controls.
    DTC is therefore proposing to amend and to restate the minimum 
requirements for transfer agents participating in the FAST program in 
order to improve the safekeeping of securities transfer agents hold for 
DTC and to provide better defined requirements as more transfer agents 
participate in the immobilization and dematerialization of securities. 
DTC's proposed minimum requirements are as follows:
    1. Transfer agent must be registered with the Commission or their 
appropriate regulatory authority, except where the transfer agent's 
participation in the FAST program is limited to acting solely for 
municipal issues (transfer agents must provide DTC with evidence of 
such) and follow all applicable rules under the Exchange Act, as well 
as all other applicable federal and state laws, rules, and regulations, 
applicable to transfer agents, including OFAC regulations.
    2. The transfer agent must execute and fulfill the requirements of 
the appropriate form of ``Balance Certificate Agreement''\10\ with 
DTC.\11\
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    \10\ DTC currently maintains three forms of the Balance 
Certificate Agreement: one for transfer agents, one for issuers 
acting as their own agent, and one for parties using a processing 
agent. DTC is consolidating these forms into a single form, as 
attached as Exhibit 2 to its initial filing.
    \11\ DTC notes that these minimum requirements incorporate by 
reference the Balance Certificate Agreement between the transfer 
agent and DTC.
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    3. The transfer agent must sign and fulfill requirements of the 
``Operational Criteria for the FAST Transfer Agent Processing''\12\ and 
must comply with all applicable provisions of DTC's ``Operational 
Arrangements'' (``OA''),\13\ as amended from time to time.\14\
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    \12\ The Operational Criteria for the FAST Transfer Agent 
Processing is attached as Exhibit 2(b) to DTC's initial filing.
    \13\ For more information relating to DTC's OA, see Securities 
Exchange Act Release Nos. 34-45994 (May 29, 2002), 67 FR 39452 [File 
No. SR-DTC-2002-02]; 34-24818 (August 19, 1987), 52 FR 31833 [File 
No. DTC-87-10]; 34-25948 (July 27, 1988), 53 FR 29294 [File No. DTC-
88-13]; 34-30625 (April 23, 1992), 57 FR 18534 [File No. DTC-92-06]; 
34-35649 (April 26, 1995), 60 FR 21576 [File No. DTC-94-19]; and 34-
39894 (April 21, 1998), 63 FR 23310 [File No. DTC-97-23].
    \14\ DTC notes that these minimum requirements incorporate by 
reference the Operational Criteria for FAST Transfer Agent 
Processing and all applicable terms in DTC's Operational 
Arrangements.
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    4. In order to provide for the operational proficiency and 
efficiency of the program, the transfer agent must complete DTC's 
training on FAST functionality on being accepted as a FAST transfer 
agent.
    5. In order to protect against a risk of loss, the transfer agent 
must carry and provide evidence of a minimum of the following standard 
form Financial Institution Bond or a commercial crime policy providing 
similar coverage in proportion to transaction volume the agent 
processes, as follows:
    a. $10 million for a transfer agent with 25,000 or fewer transfer 
transactions per year as reported to the Commission;
    b. $25 million for a transfer agent with over 25,000 transfer 
transactions per year as reported to the Commission; and
    c. In addition, the transfer agent must carry and provide evidence 
of a minimum of $1 million in Errors and Omissions insurance.
    In the event that a transfer agent can demonstrate that its 
existing coverage and/or capitalization would provide similar 
protections to DTC as the requirements set forth herein, it may apply 
to DTC for a waiver. DTC shall have sole discretion as to whether or 
not to grant any such waiver.
    6. In order to facilitate consistent protection against losses 
relating to securities in a transfer agent's control, the transfer 
agent must notify DTC as soon as practicable of notice of any actual 
lapse in insurance coverage or change in business practices, such as 
increasing volumes or other business changes that would result in the 
transfer agent requiring additional insurance coverage as outlined 
above. Such notice shall be delivered to: DTC Inventory Management--1SL 
55 Water Street New York, New York 10041
    And with a copy to: DTC General Counsel's Office 55 Water Street--
22nd Floor New York, New York 10041.
    7. The transfer agent must provide proof to DTC of any new or 
substitute policy with respect to any required insurance within five 
(5) days after the entry into force of such new or substitute policy.
    8. The transfer agent must establish and maintain electronic 
communications with DTC to balance FAST positions on a daily schedule.
    9. The transfer agent must provide on an annual basis to DTC within 
ten (10) business days of filing with the Commission, a copy of the 
Annual Study of Evaluation of Internal Accounting Control filed with 
the Commission pursuant to Exchange Act Rule 17Ad-13, attesting to the 
soundness of controls to safeguard securities assets and to the 
reliability and integrity of computer systems, including 
confidentiality of customer accounts or other non-public information. 
If a transfer agent obtains a SAS-70 audit report, the transfer agent 
shall provide DTC with a copy of the

[[Page 10851]]

report within ten (10) business days of the transfer agent's receipt of 
the report. If a SAS-70 audit report is not available, then the 
transfer agent must provide to DTC, on an annual basis within ten (10) 
business days of filing with the Commission an accountant's report 
(pursuant to Exchange Act Rule 17Ad-13, Annual Study of Evaluation of 
Internal Accounting Controls), a SSAE-10 report from an external 
certified public accountant (or an equivalent report) attesting to the 
soundness of the transfer agent's controls relating to FAST.
    10. FAST agents must safeguard all the securities assets as stated 
under Exchange Act Rule 17Ad-12, with at a minimum the following 
additional DTC requirements:
    a. maintain a theft and fire central monitoring alarm system 
protecting the entire premises and
    b. maintain all certificates in a vault, safe, or other secure 
location, accessible only by authorized personnel.
    11. Personnel with access to the safe and the codes for the 
centralized monitoring system must comply with Exchange Act Rule 17f-2, 
which includes but is not limited to rules for fingerprinting staff 
that physically handle certificates.
    12. Unless prohibited by applicable law, the transfer agent when 
applying to be a FAST agent must provide DTC with a copy of the two 
most recent deficiency or compliance correspondences from the 
Commission as well as any follow-up correspondences. In addition, 
unless prohibited by applicable law, the transfer agent on an ongoing 
basis must provide DTC with notice of any alleged material deficiencies 
documented by the Commission that may affect the activities of the 
transfer agent as a FAST Agent within five (5) business days of the 
transfer agent being notified of such material deficiencies.
    13. Unless prohibited by applicable law, during regular business 
hours and upon advance notice, DTC reserves the right to visit and 
inspect, to the extent such visits and inspections pertain to DTC's 
position, the transfer agent's facilities, books, and records. DTC, 
however, is not obligated to conduct such visits or inspections.
    14. Existing FAST agents shall have a period of six (6) months from 
the date of the Commission's approval of this rule filing to comply 
with these requirements, including the submission to DTC of a signed 
Balance Certificate Agreement, signed Operational Criteria, and all 
supporting documentation referenced herein. If an agent is not 
compliant with these requirements upon the expiration of such period, 
DTC shall have the right, using its sole discretion, to terminate or to 
continue the agent's FAST status.
    15. An agent acting on behalf of a transfer agent or an issuer 
acting on its own behalf shall have the same rights and 
responsibilities under these requirements as if it were the transfer 
agent.
(2) Proposed Amended and Restated Eligibility Requirements for DRS 
Limited Participants
    DTC is proposing the following restatement of the eligibility 
requirements for DRS Limited Participants\15\ and the DRS eligibility 
requirements for DRS issues to promote consistency with the FAST 
program requirements as well as to further ensure the soundness of the 
DRS system.
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    \15\ DRS Limited Participants are transfer agents that 
participate in DRS through DTC. They are bound to certain provisions 
of the DTC rules. Securities Exchange Act Release No. 34-37931 
(November 7, 1996) [File No. SR-DTC-96-15].
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    In order to be eligible to be a DRS Limited Participant, a transfer 
agent must:
    1. Participate in the FAST program and abide by DTC's requirements 
governing participation in the FAST program, which requirements are 
proposed to be amended by this filing;
    2. Execute a DTC Limited Participant Account agreement;
    3. Deliver transaction advices directly to investors relating to 
DRS Withdrawal-by-Transfer requests and provide DTC with a file 
containing the information required by DTC (which must include, among 
other things, the transaction advice delivery date) in a format and 
using functionality as specified by DTC from time to time;
    4. Complete DTC's training program on DRS and Profile Modification 
System (``Profile'') functionality;
    5. Participate in the Profile surety or insurance program to 
initiate Profile transactions;\16\
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    \16\ In DRS, instructions to transfer shares are sent by a 
broker-dealer that is a DTC Participant or a by a transfer agent 
that is a DRS Limited Participant through Profile. Profile provides 
screen based indemnification against false instructions from the 
party submitting the instructions through DRS. The indemnity is 
supported by either a surety bond or an insurance policy.
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    6. Implement program changes related to DTC internal systems 
modifications within a reasonable time upon receiving notification from 
DTC of such modifications;
    7. Implement program changes to support and expand DRS processing 
capabilities as agreed to by the DRS Ad Hoc Committee; and
    8. Existing DRS Limited Participants shall have a period of six (6) 
months from the date of the Commission's approval of this rule filing 
within which they must comply with these requirements. If an agent is 
not compliant with these requirements upon the expiration of such 
period, DTC shall have the right using its sole discretion to terminate 
or to continue the agent's status as a DRS Limited Participant.
(3) Eligibility Requirements for DRS Issues
    In order for an issue to be eligible as a DRS issue, the issue 
must:
    1. Have a transfer agent accepted as a DTC DRS Limited Participant;
    2. Be included in the FAST program (An issue may not be added to 
DRS if an ``out of balance'' position exists.)
(4) DTC's Proposed Standard of Care Obligations With Respect to FAST
    DTC is proposing to establish a clearer demarcation of 
responsibility and liability with respect to the FAST program. 
Historically, DTC believes the Commission has left to user-governed 
clearing agencies the question of how to allocate losses associated 
with, among other things, clearing agency functions.\17\ In conjunction 
with its approval of these standards, the Commission noted that while 
it had ``called on registered clearing agencies to undertake, by rule, 
to deliver all fully-paid securities in their control to, or as 
directed by, the participant for whom the securities are held,'' given 
that registered clearing agencies had demonstrated a high level of 
responsibility in safeguarding securities and funds, a standard of care 
based on a strict standard of liability was not required either with 
respect to failures of the clearing agency or a sub-custodian. DTC 
notes that securities in the FAST program are held by a transfer agent 
and are not within the immediate custody and control of DTC. As such, 
after a transfer agent is accepted to the FAST program, DTC is 
proposing the addition of a clarifying provision to Rule 6 to state 
that DTC will not be liable for the acts or omissions of FAST Agents or 
other third parties, unless caused directly by DTC's gross negligence, 
willful misconduct, or violation of federal securities laws for which 
there is a private right of action.

[[Page 10852]]

In addition, DTC proposes that under no circumstance shall DTC be 
liable for selecting or accepting any third party as an agent of DTC, 
including a transfer agent participating in the FAST Program.
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    \17\ Securities Exchange Act Release Nos. 34-20221 (September 
23, 1983) and 34-22940 (February 24, 1986). In this regard, DTC 
adopted a uniform standard with respect to certain of its 
procedures, or Service Guides, such that DTC is not liable for any 
loss incurred by a participant other than one caused directly by 
gross negligence or willful misconduct on the part of DTC. See 
Securities Exchange Act Release No. 34-44719 (August 17, 2001) [File 
No. SR-DTC-2001-01].
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    DTC believes the proposed rule change is consistent with the 
requirements of Section 17A of the Act, as amended,\18\ and the rules 
and regulations thereunder because it improves standards relating to 
the eligibility of transfer agents and issues for its FAST and DRS 
programs. As such, it assures the safeguarding of securities and funds 
which are in the custody or control of DTC or for which it is 
responsible.
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    \18\ 15 U.S.C. 78q-1.
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(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

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

    DTC has neither solicited nor received written comments on the 
proposed rule change.\19\
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    \19\ The Commission received 29 comment letters to DTC's 
proposed rule change as amended by Amendments 1 and 2. The comment 
letters can be found at http://www.sec.gov/comments/sr-dtc-2006-16/dtc200616.shtml.
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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 the self-regulatory organization consents, 
the Commission will:
    (A) By order approve such proposed rule change or
    (B) 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 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an e-mail to [email protected]. Please include 
File Number SR-DTC-2006-16 in the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-DTC-2006-16. 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 efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 100 F Street, 
NE., Washington, DC 20549 on official business days between the hours 
of 10 a.m. and 3:30 p.m. Copies of such filings also will be available 
for inspection and copying at the principal office of the DTC and on 
the DTC's Web site, http://www.dtcc.com. All comments received will be 
posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-DTC-2006-16 and should be submitted on 
or before March 20, 2008.

    For the Commission by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-3730 Filed 2-27-08; 8:45 am]
BILLING CODE 8011-01-P