[Federal Register Volume 61, Number 197 (Wednesday, October 9, 1996)]
[Notices]
[Pages 52985-52988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25923]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37778; File No. SR-DTC-96-15
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change Relating to the Procedures To
Establish a Direct Registration System
October 3, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on September 17, 1996, 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 on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change will establish (1) a new service called
the Direct Registration System (``DRS''), which was developed by the
securities industry, and (2) a new category of participants whose use
of DTC's services will be limited to 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, 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.\2\
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\2\ The commission has modified parts of these statements.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
The proposed rule change will amend DTC's rules (1) to establish a
new category of participant called a limited participant which would be
authorized to use only certain services of the depository; (2) to
describe the DRS service to be offered by DTC; and (3) to set forth the
requirements for (a) the admission of limited participants authorized
to use only the DRS service and (b) the eligibility of securities for
the DRS service. DRS will permit an investor to hold a security
directly in electronic form as the registered owner of the security on
the books of the issuer rather than (1) indirectly through a financial
intermediary that holds the security in street name or in an account
with a depository or (2) in the form of a certificate. The investor
will have the right to transfer its DRS position in the security to a
financial intermediary in order to sell or pledge the security or to
receive a certificate representing the security.\3\
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\3\ For a complete description of DRS, refer to Securities
Exchange Act Release No. 35038 (December 1, 1994), 59 FR 63652
(concept release on a transfer agent operated book-entry
registration system).
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To facilitate the transfer of a DRS position to a financial
intermediary, DTC will offer a new service to transfer agent, bank, and
broker-dealer participants of DTC. A transfer agent that participates
in the Fast Automated Transfer (``FAST'') program at DTC and meets the
other qualifications described below will be able to become a DRS
limited participant. Using the DRS service, an investor's DRS position
could be transferred by the DRS limited participant (i.e., the transfer
agent) to the financial intermediary acting for the investor (i.e., a
bank or broker-dealer participant) through the facilities of DTC.
Specifically, the limited participant will credit its DTC FAST account
with the amount of the security to be transferred, and DTC in turn will
credit the account of the receiving participant with that amount of the
security.\4\
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\4\ A complete description of the DRS service may be found in
the Important Notices issued by DTC on the implementation of a DRS,
which are attached as Exhibit A and Exhibit B. Important Notice B#
1368-96 (July 15, 1996) and Important Notice B# 1505-96 (July 26,
1996).
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To qualify for admission as a limited participant for DRS services,
an applicant must be a partnership, corporation, or other organization
or entity that (1) is registered as a transfer agent pursuant to
Section 17A(c) of the of the Act and Rule 17Ac2-1 thereunder, (2)
participates in the FAST program, (3) provides Direct Mail Service on
transfers, (4) accepts dividend reinvestment instructions from DTC on
DRS eligible securities that offer dividend reinvestment plans, (5)
communicates with DTC using DTC computer-to-computer (``CCF'')
platforms, and (6) executes an accountholder agreement.\5\ To qualify
as an eligible security for processing
[[Page 52986]]
through the DRS service, a security must be eligible for the FAST
program.
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\5\ Under the accountholder agreement, the transfer agent, among
other things, agrees to continue to meet the admission criteria, pay
all applicable fees, and indemnify DTC for any expense caused by the
limited participant's act or omission.
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A DRS limited participant will be charged the following fees:
1. Limited Participant Accountholder fee--$225 per month
2. Deliver Order transaction processing fee--$.45 per transaction
DTC participants receiving such a DRS delivery will also be charged
$.45 per transaction. In addition, when a DTC participant instructs a
transfer agent to establish a DRS account for a shareholder and the
transfer agent subsequently mails a transaction advice to the
shareholder confirming that such an account has been established at the
transfer agent, the transfer agent's fee of $.55 for mailing and
handling the DRS transaction advice will be charged back to the
participant directly by DTC. DTC will collect the advice fees and will
periodically remit such fees to the transfer agent.
The proposed rule change is consistent with the Congressional
objectives in Section 17A(a)(1) of the Act \6\ in that it promotes
efficiencies in the prompt and accurate clearance and settlement of
securities transactions. DRS will enhance the availability of
securities for settlement in a three business day settlement (``T+3'')
environment. Individual investors electing book-entry positions on the
books of the issuers (i.e., DRS positions) will be able to subsequently
arrange to have such positions transferred electronically to banks or
broker-dealers in connection with sales or other dispositions of the
securities. By effecting transfers through automated linkages between
transfer agents and DTC, the DRS service to be offered by DTC will
promote efficiencies in the clearance and settlement system. Moreover,
DRS will foster cooperation and coordination between DTC and other
entities engaged in the clearance and settlement of securities
transactions.
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\6\ 15 U.S.C. section 78q-1(a)(1) (1988).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC perceives no impact on competition by reason of the proposed
rule change.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others
Although DTC did not solicit comments on DRS, over the last two
years, a joint committee of representatives of the Securities Transfer
Association, the Securities Industry Association, the Corporate
Transfer Agents Association, and the depositories has met and agreed on
the features of DRS.
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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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 Room in Washington, D.C. Copies of such
filing will also be available for inspection and copying at the
principal office of DTC. All submissions should refer to the file
number SR-DTC-96-15 and should be submitted by October 30, 1996.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
Exhibit A--The Depository Trust Company
Important Notice
July 15, 1996.
B #: 1368-96
TO: All Participants
ATTENTION: Managing Partner/Officer, Cashier, Transfer Manager
SUBJECT: Implementation of a Direct Registration system
Background
In 1994, the Securities and Exchange Commission requested that
the Industry work to develop a ``Direct Registration System'' (DRS)
process, in order to provide investors with additional approaches to
holding their securities in certificateless form. Under DRS,
Investors electing to have their ownership of securities registered
on the issuer's records would be offered a choice between a
registered certificate and a book-entry or ``direct registration''
position recorded on the books of the issuer's transfer agent. An
investor electing a book-entry or DRS position would receive a
``transaction advice'' reporting creation of the position, as well
as periodic account statements evidencing it. The investor would be
able subsequently to arrange to have the DRS position transferred
electronically to a bank or broker-dealer in connection with a sale
or other disposition of the securities.
Over the last two years a joint committee of representatives of
the Securities Transfer Association, Securities Industry
Association, and the Corporate Transfer Agents Association has met
and agreed on the features of a Direct Registration system. As a
result of those discussions, it is anticipated that the DRS
alternative will be offered to investors on an initial group of
``pilot'' issues some time late in 1996 (most probably in November).
Highlights of the proposed system follow.
Overview
Eligibility
Because of the degree of systems sophistication required, the
joint committee agreed that only issues that are eligible under
DTC's Fast Automated Securities Transfer (FAST) Program should be
eligible for DRS. The Joint committee also agreed that if the issue
offers a dividend reinvestment plan (DRP) the plan must be open to
DTC participation.
FAST eligibility and DRP availability have been recommended by
the Committee to the SEC as criteria for an Issuer's DRS program.
When an issue becomes eligible for DRS, Participants will be
notified by Important Notice, and a DRS Indicator will be added to
the Eligible Corporate Securities File (ELISC and ELISCD).
Transfers
Any Withdrawal-by-Transfer (WT) request made via the Participant
Terminal System (PTS) using functions NWTI or RWTI or Computer-to-
Computer (CCF/CCFII) will be modified to include the following: DRS
indicator, Participant account number, and Participant or
correspondent broker name. The Participant should include in the
``DRS indicator'' field the appropriate code indicating whether the
transferee wants a certificate issued or a DRS position established
(instructions with this field left blank will be rejected). The
``account number'' specified should be transferee's account number
at the Participant or correspondent broker (so that the DRS agent
can include this information on its records to associate the
investor's DRS position with the submitting Participant or its
correspondent).
When a Participant's customer requests that a DRS position be
established, the DRS
[[Page 52987]]
transaction advice will be mailed directly by the agent to the
customer. The transfer agent's fee of 55 cents for mailing and
handling the DRS transaction advice will be charged back to the
participant directly by DTC, similar to the Direct Mail process. No
DRS transaction advice will be mailed or forwarded to the
Participant directly by DTC. However, DTC will receive an automated
confirmation from the transfer agent that the DRS transaction advice
has been processed and mailed and will notify the Participant.
Investor-Directed Sale
An Investor who has elected a DRS position instead of a physical
certificate will be registered directly on the transfer agent's
books. Under this option, if the investor subsequently sells the
securities through a bank or broker-dealer, the investor would
contact the agent to direct the movement of the DRS position to the
investor's bank or broker-dealer. Upon receipt of this instruction,
the agent will increase the depository position on its records and
credit its agent account at DTC established for this purpose. The
agent will also provide to DTC instructions to move the position by
a book-entry delivery directly to the investor's bank or broker-
dealer account at DTC. Systems modifications are now being made to
identify these transactions as DRS deliver orders. New reason codes
will be established for these transactions, and Participants will be
notified when this is completed.
Action Required by Participants
DTC has recently conducted two forums with Participants,
transfer agents, and service providers to discuss draft systems
specifications for all components of DRS. Final specifications,
along with a CCF user guide, are scheduled for distribution in mid-
August. Participants are urged to plan for the implementation of
these system modifications as a DRS pilot is expected to begin
November 1996 with a gradual increase in the number of DRS-eligible
issues by the end of the first quarter of 1997.
Please direct your questions to Al DeMalo, Director of
Operations, at (212) 898-3171, Ronald Burns, Vice President of
Operations, at (516) 227-4004, or your Participant Services
representative.
Ronald J. Burns,
Vice President, Operations.
Exhibit B--The Depository Trust Company, Corporate Trust Services
Important Notice
July 26, 1996.
B#: 1505-96
TO: Transfer Agents and Issuers
SUBJECT: Implementation of a Direct Registration System
Background
In 1994, the Securities and Exchange Commission requested that
the industry work to develop a ``Direct Registration System'' (DRS)
process, in order to provide investors with additional approaches to
holding their securities in certificateless form. Under DRS,
investors electing to have their ownership of securities registered
on the issuer's records would be offered a choice between a
registered certificate and a book-entry or ``direct registration''
position recorded on the books of the issuer's transfer agent. An
investor electing a book-entry or DRS position would receive a
``transaction advice'' reporting creation of the position, as well
as periodic account statements evidencing it. The investor would be
able subsequently to arrange to have the DRS position transferred
electronically to a bank or broker-dealer in connection with a sale
or other disposition of the securities.
Over the last two years a joint committee of representatives of
the Securities Transfer Association, the Securities Industry
Association, and the Corporate Transfer Agents Association has met
and agreed on the features of a Direct Registration System. As a
result of those discussions, it is anticipated that the DRS
alternative will be offered to investors on an initial group of
``pilot'' issues some time late in 1996 (most probably in November).
Highlights of the proposed system follow.
Overview
Participation
The joint committee agreed that a transfer agent or issuer
wishing to offer a DRS program to investors will need to establish a
DRS Limited Participant account at DTC in order that it may from
time to time effect a book entry transfer of securities held in the
form of a DRS position (e.g., in connection with an investor sale of
a DRS position through a depository Participant). A party wishing to
open a Limited Participant account must (1) be registered as a
transfer agent with the Securities and Exchange Commission, (2)
participate as a transfer agent in DTC's Fast Automated Securities
Transfer (FAST) program, (3) provide Direct Mail Service on
transfers, (4) accept dividend reinvestment instructions from DTC on
DRS program issues which offer dividend reinvestment, and (5)
communicate with DTC through a computer-to-computer interface using
DTC's CCF platforms. Certain of these requirements relate to the
standards for an issue's DRS eligibility (as described below).
To establish a DRS Limited Participant account, please contact
your Corporate Trust Services Agent Liaison.
Issue Eligibility
The joint committee agreed that only issues that are eligible
under DTC's Fast program can be eligible for DRS. The joint
committee also agreed that if the issue offers a dividend
reinvestment plan (DRP), the plan must be open to DTC participation.
FAST eligibility and DRP availability have been recommended by the
committee to the SEC as criteria for an issuer's DRS program.
DRS agents and issuers must provide standard 30 to 60 day prior
notification to DTC when planning to introduce DRS issues. Once an
issue becomes eligible for DRS, Participants and Limited
Participants will be notified by Important Notice, and a DRS
indicator will be added to the Eligible Corporate Securities File.
Parties wishing to make issues DRS eligible should contact DTC's
Transfer Agent Services Department.
Process Overview
Transfers/Buys
As agreed by the joint committee, all automated Withdrawal-by-
Transfer (WT) requests made by DTC Participants on DRS issues will
be modified to include the following: DRS indicator, Participant
account number, and Participant or correspondent broker name. A DTC
Participant submitting a WT on a DRS-eligible issue will include in
the ``DRS indicator'' field the appropriate code indicating whether
the transferee wants a certificate issued or a DRS position
established. The ``account number'' specified will be the
transferee's account number at the submitting Participant or
correspondent broker (so that the DRS agent or issuer can include
this information on its records to associate the investor's DRS
position with the submitting Participant or its correspondent), as
the joint committee agreed should be done.
Transfer Advice/Notifications
When a customer requests that a DRS position be established, the
DRS transaction advice should be mailed directly by the DRS agent or
issuer to the customer. Upon instruction by the DRS agent or issuer,
a fee (not to exceed 55 cents) for mailing and handling the DRS
transaction advice will be charged back to the DTC Participant
directly by DTC, similar to the Direct Mail Centralized Billing
process, and remitted, upon collection, to the DRS agent or issuer.
DTC will not accept from DRS agents or issuers, nor mail to its
Participants, any DRS transaction advices. However, DTC should
receive an electronic confirmation from the DRS agent or issuer that
the DRS transaction advice has been processed and mailed and DTC, in
turn, will notify the Participant that the transaction was
completed.
Direct-Mail return transmissions (DMAX/CF2DMX) will enable the
DRS agent or issuer to inform DTC of the certificates issued and
mailed in accordance with the Direct Mail indicator received as part
of the WT transmission.
Investor-Directed Sale
An investor who has elected a DRS position instead of a physical
certificate will be registered directly on the DRS agent's or
issuer's books. Under this option, if the investor subsequently
sells the securities through a bank or broker-dealer, the investor
would contact the DRS agent or issuer to direct the movement of the
DRS position to the investor's bank or broker-dealer. Upon receipt
of this instruction, the DRS agent or issuer will increase the
depository FAST position on its records and credit its Limited
Participant account at DTC established for this purpose. The DRS
agent or issuer will also provide to DTC instructions to move the
position by a book-entry delivery from its DRS Limited Participant
account directly to the investor's bank or broker-dealer account at
DTC. Systems modifications are now being made to identify these
transactions as DRS deliver orders. New reason codes will be
established for these transactions, and all parties will be notified
when this is completed.
[[Page 52988]]
Next Steps
DTC has recently conducted two forums with transfer agents,
issuers, Participants, and service providers to discuss draft
systems specifications for all components of DRS. Final
specifications will be distributed shortly. All interested parties
are urged to plan for the implementation of these system
modifications as a DRS pilot is expected to begin November 1996 with
a gradual increase in the number of DRS eligible issues by the end
of the first quarter of 1997.
For your convenience, please direct your questions to the
Corporate Trust Services staff listed on the attached schedule.
Ann Vece,
Group Director, Corporate Trust Services.
[FR Doc. 96-25923 Filed 10-8-96; 8:45 am]
BILLING CODE 8010-01-M
