01-20976. Self-Regulatory Organizations; The Depository Trust Company; Order Granting Approval of a Proposed Rule Change Relating to the Movement of All DRS Issues Into Profile and the Establishment of the “S” Position as the Default Position

August 14, 2001.

On May 25, 2001, The Depository Trust Company (“DTC”) filed with the Securities and Exchange Commission (“Commission”) a proposed rule change (File No. SR-DTC-2001-07) 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 June 29, 2001.^[2] No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.

I. Description

In 1996, the New York Stock Exchange, Inc. modified its listing criteria to permit listed companies to issue securities in book entry form provided that the issue is included in the Direct Registration System (“DRS”).^[3] Since then, there has been a steady growth in securities issued through DRS, primarily through corporate action distributions and initial public offerings.

In January 1999, the DRS Committee ^[4] approved system specifications for the Profile Modification System (“Profile”) and authorized DTC to proceed with the development of Profile.^[5] DTC completed production of Profile on June 15, 1999, and it has been available for use since then. Profile allows a DTC participant (i.e., a broker-dealer) to submit electronically to a transfer agent who is a “DRS limited participant” at DTC an investor's instruction that the investor's share positions be moved from the investor's DRS account with the limited participant to the investor's broker-dealer's participant account at DTC (“Electronic Participant Instruction”).^[6] Similarly, a DRS limited participant using Profile may submit an investor's instruction for the movement of the investor's share positions from the investor's broker-dealer's participant account at DTC to the investor's DRS account with the DRS limited participant (“Electronic Limited Participant Instruction”).

At the time that the Commission approved DTC's proposed rule change establishing Profile, it was contemplated that an electronic medallion program would be developed by a party that currently administers a medallion program in connection with transfers of physical certificates and that such an electronic medallion program would become part of Profile.^[7] At a meeting held on April 20, 2000, that included representatives of the Securities Transfer Association, the Corporate Transfer Association, the American Society of Corporate Secretaries, the Securities Industry Association, DTC, and the New York Stock Exchange, it was decided that because of its role in DRS, DTC would be a logical party to administer a program that would provide many of the benefits of an electronic medallion program.

As a result, DTC proposed and the Commission approved the DTC Profile Surety Program (“PSP”).^[8] PSP is open only to DTC participants or DTC DRS limited participants. DTC is the program administrator of PSP. Under PSP, in order to be able to send an Electronic Instruction, an entity is required to have a surety bond issued by either the surety bond company picked by DTC as the administrator of PSP or another surety company. Any surety bond issued by another surety bond company must have the same terms and conditions established by DTC for the PSP. For example, each surety bond must have a limit of $2 million per occurrence with an aggregate limit of $6 million. The PSP went into operation on May 3, 2001, and currently 35 broker-dealers and transfer agents have joined the program.

With PSP in place, the DRS Committee at a meeting on April 12, 2001, agreed to take steps to migrate into Profile all securities issues currently in DRS but not in Profile. As a result, DTC filed this rule filing which requires that all security issues which are presently DRS eligible but which are not eligible for processing in Profile must be made eligible for processing in Profile by November 1, 2001.^[9] Also beginning on November 1, 2001, a broker-dealer's request for a withdrawal by transfer (W.T.) ^[10] for a DRS eligible issue which does not specifically request a certificate will automatically default to a request for a DRS book-entry position (an “S” position) on the books of the issuer or its transfer agent.

II. Discussion

Section 17A(b)(3)(F) ^[11] 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.^[12] For the reasons set forth below, the Commission believes that DTC's proposed rule change is consistent with DTC's obligations under Section 17A(b)(3)(F) of the Act.

As the Commission has stated in previous orders concerning DRS, the primary purpose of Profile is to provide a more prompt and accurate mechanism for the transfer of an investor's book-entry position between the investor's broker-dealer and the transfer agent for the issue than the multistep, paper-based processing that is used when Profile is not used. The migration of all DRS issues into Profile processing, with the attendant PSP, should ensure that all investors holding securities positions in DRS will be able to transfer their shares back and forth between their broker-dealers and the transfer agents for the issuers in a prompt and accurate manner.

In addition, the establishment of “S” position as DTC's W.T. default should increase the number of investors who are able to more efficiently move their securities through DRS by reducing the number of instances when an investor receives a certificate not because the investor requested a certificate but because the investor's broker-dealer fails to elect either a certificate or a DRS position on its W.T. request.

As set forth above, the Commission finds that DTC's rule change (1) mandating that all DRS issues must be able to be processed through Profile and (2) establishing the “S” position as DTC's W.T. default position is consistent with Section 17A(b)(3)(F) of the Act because it should facilitate the more efficient transfer of investors' security positions and thereby should promote the prompt and accurate clearance and settlement of securities transactions.

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-2001-07) be and hereby is approved.

For the Commission by the Division of Market Regulation, pursuant to delegated authority.^[13]

Jonathan G. Katz,

Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  Securities Exchange Release No. 44471, (June 22, 2001), 66 FR 34728.

3.  Securities Exchange Act Release No. 37937 (November 8, 1996), 61 FR 58728 [File No. NYSE 96-29]. Similarly, the National Association of Securities Dealers modified its rule to require that if an issuer establishes a direct registration program, it must participate in an electronic link with a securities depository in order to facilitate the electronic transfer of the issue. Securities Exchange Act Release No. 39369, (November 26, 1997), 62 FR 64034 [File No. SR-NASD-97-51].

4.  The DRS Committee is comprised of representatives from DTC and the brokerage and transfer agent communities and is responsible for designing DRS.

5.  For a description of Profile, refer to Securities Exchange Act Release No. 41862 (September 10, 1999), 64 FR 51162 (order approving implementation of Profile).

6.  A broker-dealer can also use Profile to electronically add or update broker-dealer information to a shareholder's record at the transfer agent.

7.  Securities Exchange Act Release No. 42704 (April 19, 2000), 65 FR 24242 [File No. SR-DTC-00-04].

8.  Securities Exchange Act Release No. 43586 (November 17, 2000), 65 FR 70745 [File No. SR-DTC-00-09] (order approving PSP).

9.  If a securities issuer whose issue is currently eligible in DRS does not agree to allow processing of its securities through Profile by November 1, 2001, that issuer will be prohibited from establishing any new DRS positions.

10.  W.T. is a service that allows participants to withdraw physical stock or registered bond certificates from DTC and have them registered in a name other than Cede & Co., DTC's nominee name.

11.  15 U.S.C. 78q-1(b)(3)(F).

12.  The prompt and accurate clearance and settlement of securities transactions includes the transfer of record ownership of securities. 15 U.S.C. 78q-1(a)(1)(A).

13.  17 CFR 200.30-3(a)(12).