[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56279-56280]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28169]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40552; SR-DTC-98-16]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of a Proposed Rule Change Modifying the Initial Public Offering
Tracking System
October 14, 1998
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 19, 1998, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') the proposed rule change 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 from interested persons on the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Under the proposed rule change, DTC will modify its Initial Public
Offering (``IPO'') tracking system. Specifically, DTC will process
resales by institutional customers of shares in new issues that are
being tracked through the IPO tracking system without first determining
the identity of the syndicate members that distributed the shares being
resold. In addition, DTC will begin to fill stock loans of shares in
new issues with shares purchased in the secondary market prior to using
shares received in the initial distribution.\2\
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\2\ DTC has prepared written procedures concerning resales by
institutions and stock loans to implement the proposed rule change.
The complete text of these procedures is attached as Exhibit 2 to
DTC's filing, which is available for inspection and copying at the
Commission's public reference room and through DTC.
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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.\3\
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\3\ The Commission has modified the text of the summaries
prepared by DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Resales of IPO Shares by Institutions
The IPO tracking system \4\ allows lead managers of new issues to
monitor ``flipping'' \5\ of shares in new issues that are distributed
by book-entry through DTC rather than by use of certificates. When a
lead manager in an IPO notifies DTC of its decision to use the IPO
tracking system, the system establishes a database of information about
the customers who purchased the IPO shares (``IPO database''). Before
DTC processes a resale of IPO shares, the redelivering participant is
required to provide information about its customer which is then
compared with the customer detail in the IPO database so that DTC can
determine and report to the lead manager the identity of the syndicate
member(s) whose customer has resold IPO shares.
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\4\ For a detailed description of the IPO tracking system, refer
to Securities Exchange Act Release No. 37208 (May 13, 1996) (order
approving proposed rule change).
\5\ Flipping occurs when a syndicate's lead manager is
supporting an IPO with a stabilization bid (i.e., the lead manager
is purchasing shares in the secondary market in order to keep the
price of the issue from dropping below its initial offering price),
and shares in the IPO that had been distributed to investors are
resold by those investors in the secondary market to a syndicate
member. The lead manager may wish to identify flipped transactions
so that underwriting concessions (i.e., the discount from the
offering price received by syndicate members) can be recovered from
the appropriate syndicate members.
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When IPO shares are sold by a retail customer, the customer detail
used is normally provided by the same participant that populated the
IPO database (i.e., the syndicate member). Therefore, it is unlikely
for the processing of a resale of IPO shares to be delayed because of a
failure to match the identity of the reselling customer with any of the
customers included in the IPO database.
When the IPO shares are distributed to an institutional customer,
the syndicate member making the distribution is rarely the same
participant that acts as an institution's agent for settlement. As a
result, before DTC will process an institutional customer's resale of
IPO shares, the IPO tracking system must match customer detail provided
by the redelivering participant (i.e., the institution's agent) with
customer detail included in the IPO database by the syndicate member.
DTC believes that many redeliveries of IPO shares for institutional
customers during the period from three days prior to closing to three
days after closing are not being processed efficiently because the
customer detail provided by the institution's agent does not match any
customer in the IPO database.\6\ Usually, a mismatch occurs because
incorrect customer account information (e.g., missing digits or
transposed characters) was entered into the IPO database and does not
match the customer account information entered by the reselling
institution's agent.\7\ A failure to match may also occur when on the
day an issue closes an institution's agent attempts to redeliver IPO
shares that were not distributed to its participant account until late
in the processing day.\8\
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\6\ Because shares in new issues can be traded on a when-issued
basis, the IPO tracking system allows participants to enter
redeliveries of IPO shares as early as three business days prior to
the date the issue closes and is distributed through the depository.
\7\ In order for processing of the redelivery to be effected in
a timely manner, the institution's agent must immediately react to
the mismatch either by reclaiming the IPO shares to the syndicate
member that distributed the shares to the institution and requesting
that the customer account information be corrected or by making
adjustments to the IPO database itself.
\8\ Ordinarily, assuming the agent has sufficient position in an
issue, the redelivery would be effected. However, if an issue is
being tracked, the redelivery will fail because account information
relating to its reselling institutional customer is not yet resident
in the IPO database.
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Therefore, DTC is proposing to process resales by institutional
customers of shares in new issues that are being tracked through the
IPO tracking system without first determining the identity of syndicate
members that distributed the shares being resold. DTC intends for the
[[Page 56280]]
proposed rule change to eliminate inefficiencies in the IPO tracking
system that may unnecessarily cause redeliveries of IPO shares to fail.
DTC believes that even with the proposed modification, a lead manager
should in most cases be able to determine the identity of the syndicate
member(s) whose institutional customer has resold IPO shares.\9\
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\9\ DTC has informed the Commission that the IPO tracking system
will continue to try to determine the identity of the syndicate
members whose institutional customer has resold IPO shares.
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2. Stock Loans
Currently, when a participant that has received a distribution of
shares in an issue that is being tracked makes a stock loan in that
issue, the system attempts to fulfill that delivery by first using
shares received during the initial distribution. DTC then reports these
transactions to the lead manager. Under the proposed rule change, DTC
will attempt to satisfy the stock loan by first using the lending
participant's ``secondary market shares'' (i.e., shares previously
reported to the lead manager as having been ``flipped'' or shares
purchased by the participant in the secondary market). As a result,
stock loan transactions will not be reported to the lead manager to the
extent that they are processed using secondary market shares. The
purpose of this proposal is simply to eliminate unnecessary reporting.
DTC believes that the proposed rule change is consistent with
Section 17A of the Act \10\ and the rules and regulations thereunder
because it will eliminate inefficiencies in the system. In addition,
DTC believes that the availability of the IPO tracking system reduces
the costs, risks, and delays associated with the physical delivery of
certificates.
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\10\ 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 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
The proposed rule change is supported by the IPO Tracking Industry
Working Group, an industry group representing underwriters and
custodian banks that meets monthly with DTC to discuss the operation of
the IPO tracking system.
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 funds
such longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which DTC 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing also will be available for
inspection and copying at the principal office of DTC. All submissions
should refer to File No. SR-DTC-98-16 and should be submitted by
November 12, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28169 Filed 10-20-98; 8:45 am]
BILLING CODE 8010-01-M
