[Federal Register Volume 61, Number 121 (Friday, June 21, 1996)]
[Notices]
[Pages 31989-31991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-15908]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37314; File No. SR-DTC-96-08]
Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Accelerated Approval of a Proposed Rule Change To
Establish a Custody Service for Certain Non-Depository Eligible
Securities
June 14, 1996.
On April 2, 1996, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') a proposed rule
change (File No. SR-DTC-96-08) pursuant to Section 19(b)(1) of the
Securities
[[Page 31990]]
Exchange Act of 1934 (``Act'') \1\ to establish a custody service for
certain non-depository eligible securities. Notice of the proposal was
published in the Federal Register on June 7, 1996.\2\ No comment
letters were received. For the reasons discussed below, the Commission
is granting accelerated approval of the proposed rule change.
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\1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
\2\ Securities Exchange Act Release No. 37256 (May 30, 1996), 61
FR 29158.
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I. Description
The rule change will establish a method by which the securities
industry can centralize the safe-keeping of certificates which are not
currently deposited at DTC because either the DTC participant desires
that the certificate be held in customer or firm name or the issue is
not eligible for full depository services (e.g., securities with
certain transfer restrictions). The Custody Service will permit DTC
participants to deposit such securities at DTC for safe-keeping and
other limited depository services.\3\ Certificates deposited through
the Custody Service will be held by DTC in customer or firm name and
will not be transferred into DTC's nominee name. Therefore, a security
issue deposited through the Custody Service (``Custody Issue'') will
not be eligible for all DTC book-entry services unless a depositing
participant directs DTC to transfer the position originally credited to
the participant's custody free account to the participant's general
free account.\4\
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\3\ A more detailed description of DTC's proposed Custody
Services is set forth in Exhibit B, ``DTC Custody Service,'' to the
filing, which is available for review at the Commission's Public
Reference Room.
\4\ All necessary documents (e.g., stock powers or endorsements)
to effect a legal transfer from customer or firm name to DTC's
nominee name must be deposited with DTC prior to or
contemporaneously with a participant's instruction to transfer the
position from a participant's custody free account to the
participant's general free account. Custody Issues eligible for
transfer from a participant's custody free account to its general
free account are those Custody Issues for which (i) all necessary
documents of transfer are on deposit at DTC, (ii) there are no
pending restrictions on transferability, and (iii) the issue is
otherwise DTC eligible.
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The Custody Service will be implemented in three phases. This order
approves implementation of the first two phases.\5\ As each phase is
introduced, additional services will be offered to DTC participants.
During Phase I, DTC will accept deposits, process withdrawals, and
transfer eligible Custody Issues into a participant's general free
account. DTC will designate two segregated (``seg'') accounts of the
participant's DTC general account for Custody Service use. One seg
account will be utilized to reflect securities on deposit with DTC that
are stored in DTC's vault (``custody free account''). The second seg
account will be utilized to reflect previously deposited securities
placed in-transit (``custody transfer account'').\6\
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\5\ Phase I will be implemented immediately and Phase II will be
implemented in several months. DTC will be required to notify the
Commission in writing thirty days prior to the scheduled
implementation of Phase II of the Custody Service or sooner, if
known. If there are deviations in the manner of implementation or in
the operation of Phase II from those that are described in the
proposed rule change (File No. SR-DTC-96-08), DTC will be required
to file a proposed rule change in accordance with Section 19(b)(1)
of the Act prior to commencement of operation of Phase II. In
addition, DTC will be required to file a proposed rule change
pursuant to Section 19(b)(1) prior to implementation of Phase III
because Phase III operations will require additional development to
accommodate the processing of stock dividends.
\6\ For example, a participant having previously deposited into
the Custody Service a certificate (``certificate No. 1'')
representing 1,000 shares of a Custody Issue registered in the name
of ABC submits a withdrawal-by-transfer (``WT'') instruction to
register 100 shares of such stock in the name of XYZ with the
balance to remain registered in the name of ABC. Upon receipt of the
WT request, DTC will (i) decrease the participant's custody free
account by 1,000 shares, (ii) increase the participant's custody
transfer account by 1000 shares, and (iii) delete certificate No. 1
from the custody certificate database (described infra note 7).
Certificate No. 1 and the WT instructions then will be forwarded to
the transfer agent. When DTC receives the newly issued certificates
from the transfer agent, DTC will (i) decrease the participant's
custody transfer account by 1000 shares, (ii) deliver the
certificate representing 100 shares to ABC as prescribed by the WT
instructions, (iii) increase the participant's custody free account
by 900 shares, and (iv) add the certificate representing 900 shares
to the custody certificate database.
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DTC participants will access the Custody Service through a new
participant terminal system (i.e., DTC's PTS System) application that
will interface with the custody certificate database \7\ in a real time
manner and will provide separate Custody Service inquiry and processing
options. The inquiry options will enable participants to retrieve and
view certificate level detail of Custody Service deposits stored in the
custody certificate database. In addition to the PTS function,
participants will be able to submit Custody Service transactions
through existing DTC outputs including computer-to-computer, main frame
dual host, and the distributed program link.
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\7\ The custody certificate database will reflect the
certificate number, denomination, issuance date, registration, and
other pertinent details of each certificate deposited into the
Custody Service.
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Phase II of the Custody Service will add redemption and
reorganization services. When a custody position becomes the subject of
a reorganization or redemption, DTC generally will report the event to
its participants using existing services.\8\ In addition, DTC
participants will be able to utilize DTC's Reorg Deposit Service \9\ to
present eligible Custody Issues for mandatory reorganizations, full and
partial calls, maturities, name changes, reverse splits, mergers, and
other similar activities. Participants will be able to submit
negotiable and transferrable Custody Issues for voluntary
reorganizations through existing, modified services. DTC also will
collect and distribute the proceeds derived from the presentment of
custody deposits.
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\8\ DTC will require its participants to notify DTC of
redemptions and reorganizations involving Custody Issues where DTC
has not already announced such an activity.
\9\ The Reorg Deposit Service enables DTC participants to
deposit at DTC certificates for up to two years after the
reorganization activity and to have DTC collect the proceeds on
their behalf. For a complete description of DTC's Reorg Deposit
Service, refer to Securities Exchange Act Release No. 34189 (June 9,
1994), 59 FR 30818 [SR-DTC-94-06] (notice of filing and immediate
effectiveness of proposed rule change).
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In Phase III of the Custody Service, DTC will implement the
capability to collect and distribute dividend and interest payments for
Custody Issues. DTC intends only to implement Phase I at this time with
the other phases to follow in accordance with the experience and needs
of DTC participants.\10\
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\10\ Supra, note 5.
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DTC believes that the Custody Service will provide brokers and
dealers with appropriate control over Custody Issues for purposes of
Rule 15c3-3(b) \11\ under the Act. In accordance with the requirements
for the satisfactory control of securities set forth in Rule 15c3-
3(c)(5),\12\ DTC believes (i) it is a ``bank'' within the meaning of
Section 3(a)(6) of the Act because it is a member bank of the Federal
Reserve System, (ii) the delivery of Custody Issues to brokers and
dealers will not require the payment of money or value, and (iii) the
Custody Issues in DTC's custody or control will not be subject to any
right, charge, security interest, lien, or claim of any kind in favor
of DTC or any person claiming through DTC.
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\11\ 17 CFR 240.15c3-3(b) (1995).
\12\ 17 CFR 240.15c3-3(c) (1995).
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II. Discussion
Section 17A(b)(3)(F) \13\ of the Act requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions and to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible. The
Commission believes DTC's proposed
[[Page 31991]]
rule change is consistent with DTC's obligations under Section 17A of
the Act because the rule change will allow DTC participants to remove
certificates representing Custody Issues from their vaults and to
deposit them into the Custody Service at DTC. Depositing certificates
into the Custody Service along with the correspondent eligibility of
Custody Issues for certain DTC securities processing services should
help to reduce the costs, inefficiencies, and risks associated with the
physical safekeeping of these securities outside of DTC and thereby
should promote the prompt and accurate clearance and settlement of
transactions in and the safeguarding of these types of securities.
Moreover, the Commission believes the proposal is consistent with DTC's
obligations to safeguard securities and funds under its control because
Custody Issues on deposit at DTC will not be subject to any right,
charge, security interest, lien, or claim of any kind in favor of DTC
or any person claiming through DTC.
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\13\ 15 U.S.C.Sec. 78q-1(b)(3)(F) (1988).
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DTC has requested that the Commission find good cause for approving
the proposed rule change prior to the thirtieth day after the date of
publication of notice of the filing. The Commission finds good cause
for so approving the proposed rule change because accelerated approval
will permit DTC participants to begin immediately the process of
transferring Custody Issues to DTC in order that they may utilize the
Custody Service as soon as possible. Furthermore, the Commission has
not received any comment letters and does not expect to receive any
comment letters on the proposal.
III. 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 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-96-08) be and hereby is
approved on an accelerated basis.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12) (1995).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-15908 filed 6-20-96; 8:45 am]
BILLING CODE 8010-01-M
