[Federal Register Volume 64, Number 182 (Tuesday, September 21, 1999)]
[Notices]
[Pages 51162-51165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24495]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41862; File No. SR-DTC-99-16]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Amendment and Order Granting Accelerated Approval
of a Proposed Rule Change Relating to Implementation of the Profile
Modification System Feature of the Direct Registration System
September 10, 1999.
On June 17, 1999, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') and on July 22,
1999, and August 31, 1999, as amended a proposed rule change (File No.
SR-DTC-99-16) pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act'').\1\ Notice of the original proposal and first
amendment were published in the Federal Register on June 23, 1999,\2\
and on July 29, 1999,\3\ respectively. The Commission received twenty-
two comments in response to the proposed rule change.\4\ The Commission
is publishing this notice and order to solicit comments on the August
31, 1999, amendment from interested persons and to grant accelerated
approval of the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 41535 (June 17, 1999),
64 FR 33539 (July 23, 1999).
\3\ Securities Exchange Act Release No. 41643 (July 22, 1999),
64 FR 41171 (July 29, 1999).
\4\ Telephone conversation between Jerome J. Claire, John
Cirrito, and Don Kittel, Securities Industry Association, with
Robert Colby, Deputy Director, Division of Market Regulation,
Securities and Exchange Commission (July 20, 1999). Letters from
Vickie Dear, Department Leader, and Mark Leverenz, Principal, Edward
Jones (July 6, 1999); Timothy J. Carlin, Senior Counsel, Wells Fargo
& Company (July 13, 1999); Frank M. Ciavarella, First Vice
President, Prudential Securities (July 13, 1999); Paul Morelli,
First Vice President, The Cashiers' Association of Wall Street, Inc.
(July 13, 1999); Robert Dietz, President, STA (July 14, 1999);
Jerome J. Clair, Chair, SIA Operations Committee, and John Cirrito,
Chair, SIA Subcommittee on DRS, SIA (July 15, 1999); William Talbot,
Vice President, Pershing, (July 15, 1999); Eric D. Kamback, Senior
Vice President, The Bank of New York (July 15, 1999); Fred Enriquez,
President, Securities Operations Division (July 16, 1999); Kenneth
F. Kaplan, Vice President and Chief Financial Officer, Regal-Beloit
Corporation (July 19, 1999); Patricia Trevino, Chair, Securities
Industry Committee, American Society of Corporate Secretaries (July
19, 1999); Jerome J. Clair, Chair, SIA Operations Committee, and
John Cirrito, Chair, SIA Subcommittee on DRS, SIA (August 11, 1999);
Robert E. Smith, Assistant Corporate Secretary, Reliant Energy
(August 11, 1999); Jason Korstange, Senior Vice President, TCF
Financial Corporation (August 16, 1999); Scott A. Ziegler, Ziegler &
Altman LLP (August 17, 1999); Joseph F. Spadaford, President of
First Chicago Trust Division and Charles V. Rossi, President of
Boston EquiServe Division, EquiServe (August 19, 1999); American
Stock Transfer & Trust Company, The Bank of New York, ChaseMellon
Shareholder Services, Continental Stock Transfer & Trust Company,
EquiServe, First Union, Harris Trust & Savings Bank, Norwest
Shareowner Services (August 20, 1999); Richard P. Randall, Vice
President, Associate General Counsel, Assistant Corporate Secretary,
Avery Dennison (August 23, 1999); Warren G. Andersen, Attorney and
Assistant Secretary, General Motors Corporation (August 25, 1999);
Thomas L. Montrone, President and Chief Executive Officer, Registrar
and Transfer Company (August 26, 1999); Ian Yewer, President and
Chief Operating Officer, American Securities Transfer and Trust,
Inc. (August 30, 1999).
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I. Description
The Direct Registration System (``DRS''), as developed by the DRS
Committee,\5\ is a facility that allows investors the ability to hold
their securities on the issuer's books, through the issuer's transfer
agent, rather than holding in street name or in certificated form.\6\
Instructions to create investors' book-entry positions in DRS or to
move those positions are transmitted through an electronic system. The
DRS facility is administered by DTC and uses DTC's systems to effect
DRS transactions.\7\ The DRS Committee meets on a regular basis to
discuss the on-going development of DRS and to form the policies,
systems, and operational procedures needed to implement these
developments.
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\5\ The DRS Committee is an industry committee responsible for
designing DRS. Its members include the Securities Transfer
Association, the Securities Industry Association, the Corporate
Transfer Agents Association, and DTC.
\6\ For a history of DRS and a description of the original DRS
concept, see Securities Exchange Act Release No. 35038 (December 1,
1994), 59 FR 63652 (concept release relating to the direct
registration system) (``Concept Release''). As described in the
Concept Release, DRS was determined to be a means to reducing
systemic risk in the marketplace by reducing the timeframes for
settling securities transactions. The Commission continues to
believe DRS will be an important element in achieving a shorter
settlement periods. Cf. Section 17A(e) of the Act.
\7\ Securities Exchange Act Release No. 37931 (November 7,
1996), 61 FR 58600 (November 15, 1996) [File No. SR-DTC-96-15]
(order relating to the establishment of DRS).
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The purpose of DTC's filing is to resolve an impasse that developed
[[Page 51163]]
among members of the Securities Transfer Association (``STA'') and the
Securities Industry Association (``SIA'') relating to the
implementation of the Profile Modification System feature (``Profile'')
\8\ of DRS. Profile will allow a DTC participant (i.e., a broker-
dealer) upon instructions from the participant's customer to
electronically request that a ``DRS limited participant'' of DTC (i.e.,
a transfer aggent) \9\ to move the customer's DRS positions to the
participant's account at DTC.\10\ Profile will be available through
both DTC's Participant Terminal System (``PTS'') and DTC's Computer-to-
Computer Facility (``CCF'').
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\8\ Profile is an electronic communication system through DTC
which allows participants and DRS Limited Participants to send
instructions to each other regarding the movement of DRS shares.
\9\ For a description of DRS limited participants, refer to
Securities Exchange Act Release No. 37931 (November 7, 1996), 61 FR
58600 (November 15, 1996) [File No. SR-DTC-96-15].
\10\ Profile will also allow a DRS limited participant upon
instructions from a customer to electronically request a participant
to move the customer's positions from the participant's account at
DTC to the customer's account at the DRS limited participant.
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Representative members of the STA reported to the DRS Committee
that some transfer agents may not be able to implement Profile until
some time in calendar year 2000. Members of the SIA, on the other hand,
expected Profile to be implemented during the third quarter of 1999 and
are concerned that implementation will be delayed indefinitely. Because
of differing views on the implementation schedule for Profile, no
industry consensus has emerged on whether DRS should continue to
operate as it does today or whether use of DRS should be restricted in
some manner until Profile is implemented.
As an industry utility and administrator of the systems used to
facilitate DRS activity between participants and DRS limited
participants, DTC initially filed and amended its proposed rule change
to request guidance from the Commission in resolving the impasse
between members of the STA and the SIA. DTC proposed four options on
how to proceed in the implementation of Profile.\11\ The options
included:
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\11\ DTC initially proposed three options. Options (1) through
(3), on making additional securities issues eligible for inclusion
in DRS. However after publication of the proposed rule change,
several DRS limited participants indicated that they may be
operationally able to implement the Profile feature by the proposed
deadline of August 31, 1999, or shortly thereafter. In addition, the
SIA submitted a comment letter supporting the concept of permitting
any DRS limited participant capable of using the Profile feature by
the August 31, 1999, deadline to be able to do so and to allow that
DRS limited participant to make additional issues eligible. [See
letter form Jerome Clair, Chair, SIA Operations Committee, to
Jonathan Katz, Secretary, Commission (July 14, 1999).] As a result
of these developments, DTC amended its proposed rule change to add
on additional option, Option (4), to its recommendations.
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(1) if all DRS limited participants are not able to implement
Profile by September 13, 1999,\12\ no additional securities issues
would be made eligible after September 13, 1999, for inclusion in DRS
until sometime in the first quarter of 2000 when all DRS limited
participants are able to implement Profile using either DTC's PTS, or
its CCF;
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\12\ DTC originally proposed a deadline of August 31, 1999.
However DTC amended its proposed rule change to change the deadline
to September 13, 1999. Securities Exchange Act Release No. 41643
(July 22, 1999), 64 FR 41171 (July 29, 1999).
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(2) securities issues would continue to be made eligible for
inclusion in DRS in the manner in which they are currently make
eligible for inclusion;
(3) securities would continue to be made eligible for inclusion in
DRS provided that each DRS limited participant could be the DRS limited
participant for no more than two new issues per month. If all DRS
limited participants are not able to implement Profile by using PTS or
CCF by March 31, 2000, no additional securities issues would be made
eligible for inclusion in DRS until such time as all DRS limited
participants are ready to use Profile; or
(4) if a DRS limited participant implements Profile by September
15, 1999,\13\ either through PTS or CCF, that DRS limited participant
will be allowed to continue to make securities eligible for inclusion
in DRS. Any DRS limited participant that does not implement Profile
either through PTS or CCF by September 15, 1999, will not be allowed to
make additional securities eligible for DRS until such time as it
implements Profile after January 15, 2000.
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\13\ In both amendments, DTC proposed to require use of Profile
by September 13, 1999, in Option (4). However, DTC recently filed a
proposed rule change addressing Year 2000 system concerns in which
it plans to close its systems on September 15, 1999, to any system
changes, testing of its systems with participants not currently
using a specific DTC system, and new participants. Securities
Exchange Act Release No. 41799 (August 27, 1999), 64 FR 48690
(September 7, 1999) [File No. SR-DTC-99-20]. DTC is extending the
date in Option (4) of the DRS filing to September 15, 1999, in order
to have consistent cutoff dates. Conversation with Jeffrey T.
Waddle, Associate Counsel, DTC, with Susan Petersen (September 9,
1999). Since adding new DRS limited participants or permitting
current DRS limited participants to use Profile requires DTC to test
its systems with the DRS limited participant, DTC's general
September 15, 1999, systems cutoff date applies to DRS applications.
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DTC also amended the proposed rule change to clarify its
description of Profile by adding language indicating that Profile was
developed to incorporate the use of an ``electronic medallion
guarantee.'' \14\
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\14\ Supra note 3.
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On August 31, 1999, DTC filed its second amendment to withdraw
Options (1), (2), and (3). Based on the comment letters it received and
on its discussions with Commission staff, DTC believes that Option (4)
represents the most equitable option.
II. Comment Letters
The Commission received twenty-one comment letters.\15\ Five
commenters, representing primarily broker-dealers or associations
representing broker-dealer interests, support limitations on making
additional issues eligible if all DTC limited participants are not able
to implement Profile by August 31, 1999, [i.e., Option (1)]. While
generally supporting the concept of DRS, these commenters state that
their understanding of the DRS concept includes the ability of
shareholders to ``recover'' their shares once the issuer places the
securities in DRS. The commenters contend that the current system is
not working because it is labor intensive, error-prone, confusing to
investors, and causing unreasonable delays in confirming receipt of
customers' positions, transferring customers' shares, and crediting
customers with sale proceeds.\16\ One of the five commenters stated it
experiences an average ``turnaround time'' of twenty-six to thirty
days.\17\
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\15\ Supra note 4.
\16\ Because DRS limited participants are currently not using
Profile to receive instructions, brokers or their customers must
submit requests to move DRS shares by sending a transaction advice
to the DRS limited participant generally through the U.S. mail or a
commercial delivery service. Once the transaction advice is received
by the transfer agent and processed, the transfer agent delivers the
shares through DTC's Delivery Order system to the broker's account
at DTC.
\17\ The commenter's reference to turnaround time refers to the
time between when that broker submits the transaction advice to the
transfer agent for transfer and when the position is credited to the
broker-dealer's account at DTC.
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One commenter supports limitations on making additional issues
eligible applicable to those agents that are not using Profile by
September 13, 1999, [i.e., Option (4)].\18\ This commenter states that
requiring the use of Profile will not impose any significant system
changes on most DRS limited participants (this is particularly true if
the DRS limited participant receives instructions through PTS) and is
preferable to the current paper-based
[[Page 51164]]
processing because DRS limited participants will receive instructions
in a uniform manner. Furthermore, this commenter states that because
some transfer agent representatives on the DRS Committee recently
reopened issues the commenter believes had been addressed and agreed
upon by the DRS Committee, it believes that transfer agents are not
operating in good faith to resolve the outstanding operational and
liability issues facing DRS.
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\18\ The SIA submitted two letters. One letter addressed the
proposed rule change which recommended Options (1) through (3). The
second letter addressed DTC's first amendment which added Option
(4). (See letters from Jerome J. Claire and John Cirrito, SIA.)
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Thirteen commenters, representing primarily issuers and transfer
agents, support continuation of DRS as it is currently operating [i.e.,
Option (2)]. These commenters believe that the unrestricted ability to
allow issues to be made eligible in DRS is in the public interest. They
contend that DRS as it is operating today (i.e., without Profile)
benefits the marketplace by providing shareholders with another option
on how to hold their securities and by providing issuers and their
transfer agents with cost savings from not having to issue and process
physical certificates.
Three of these twelve commenters do not support the use of Profile
in DRS at this time due to the number of unresolved issues surrounding
its use in the marketplace.\19\ They contend that there are fundamental
flaws with Profile in its current form, including insufficient
protection for both issuers and investors against fraudulent transfers.
One of these three commenters said it would oppose a system that allows
transfers without direct instruction from the shareholder or its legal
agent.\20\ Another of these three commenters suggests that use of
Profile as proposed may constitute an invalid transfer and that this
issue should also be carefully considered in light of both domestic and
foreign law.\21\
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\19\ One of these commenters, the STA, submitted an extensive
comment letter expressing its opinion on a number of issues
including perceived legal defects in DTC's filing and unaddressed
liability risks to issuers and transfer agents in the movement of
shares through DTC's systems and its recommendations on issues that
the STA believes should be resolved prior to implementing Profile.
\20\ On this issue, the commenter does not address the argument
that the broker may be considered as the customer's legal
representative for purposes of conveying its customer's instruction
to move the DRS positions from the issuer's books to the broker's
account at DTC.
\21\ The Commission staff is working with the DRS Committee and
the New York Stock Exchange to address issues regarding the
application of the Uniform Commercial Code to the use of Profile and
the underlying electronic medallion guarantee.
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Seven commenters generally accept the use of Profile as part of DRS
but do not support its implementation until such time as the
outstanding issues concerning liability are resolved.One of these seven
commenters believes Profile should not be a condition of participating
in DRS and that issuers should be given an option as to whether to use
Profile for their issues. The three remaining commenters do not take a
position on Profile but believe discussions regarding use of Profile in
DRS should proceed separately from DRS use and eligibility
requirements.
Finally, one commenter supports allowing transfer agents to make
two or three issues eligible per month, and if all agents are not using
Profile by an established date in 2000,\22\ to discontinue allowing any
new issues to be made eligible until such time as all agents are using
Profile [i.e., Option (3)]. This commenter conditioned its comment in
favor of this option on DTC revising the cut-off date from March 31,
2000, to June 30, 2000. This commenter contends that the DRS Committee
needs additional time to resolve outstanding issues that are critical
to operating DRS efficiently and effectively. Delaying implementation
until these issues are resolved, this commenter believes, will benefit
both investors and the industry.
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\22\ The commenter believes June 30, 2000, to be a more
reasonable date than March 31, 2000, in light of the system changes
the commenter believes DRS limited participants will have to
undertake before they will be able to implement Profile. (See letter
from Timothy J. Carlin, Wells Fargo & Company.)
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III. Discussion
Section 17A(b)(3)(F) of the Act \23\ requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions \24\ and to remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions. The Commission believes that the proposed rule change is
consistent with DTC's obligations under Section 17A(b)(3)(F).
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\23\ 15 U.S.C. 78q-1(b)(3)(F).
\24\ Pursuant to Section 17A(a)(1)(A) of the Act, the prompt and
accurate settlement of securities transactions includes the transfer
of record ownership of securities.
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By permitting only those DRS limited participants that use Profile
to continue to make issues eligible for DRS, a more efficient mechanism
for the transfer of DRS positions between an investor's broker-dealer
and the transfer agent should be promoted. Currently, there is
substantial evidence to indicate that the transfer of DRS positions,
which is presently a multi-step, paper-based process, is labor
intensive and slow. For an investor to move a DRS position from a DRS
limited participant to a broker, the investor must have a transaction
advice signature guaranteed and physically delivered to the DRS limited
participant. When the transaction advice is received, the DRS limited
participant enters the information into its system to process the
instructions. Only after the DRS limited participant completes its
processing is the investor's DRS position moved to the broker. In
addition, since the information contained on the transaction advices is
not standardized throughout the industry, investors (or brokers sending
the transaction advices on behalf of their customers) do not always
provide the correct or complete information necessary to process the
instructions. Furthermore, an investor generally can not sell, pledge,
tender, or otherwise dispose of a DRS position until the broker's
account at DTC has been credited with the shares.\25\
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\25\ In contrast, an investor with a stock certificate can
immediately sell, pledge, tender, etc. her shares with a broker.
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Using Profile, DRS participants will send standardized information
which thereby should reduce the possibility that the instruction will
be rejected due to errors or incomplete information. Because Profile is
an electronic system that eliminates the need for the information to be
physically delivered, it should make the processing of DRS instructions
more efficient and should give investors the ability to execute
transactions using their DRS positions in a time frame that is at least
as fast as when using certificate. In short, Profile should reduce the
time it takes for the DRS limited participant to receive and process
DRS instructions.
Accordingly, while several DRS limited participants believe that
DRS is working well today and that there should not be any changes made
or conditions imposed on making issues DRS eligible, the Commission
believes that DTC's decision to require a DRS limited participant to
use Profile before making any additional issues DRS eligible is
consistent with DTC's statutory obligations under Section 17A of the
Act because by adding efficiencies and reducing the potential for
errors, the proposed rule change should promote the prompt and accurate
clearance and settlement of securities transactions and help perfect
the mechanism of a national system for the prompt and accurate
clearance and settlement of securities transactions.
The Commission also finds that requiring those participating in DRS
to use the Profile feature is consistent with the general purposes of
Section 17A of the Act. When enacting Section 17A, Congress set forth
its findings that the
[[Page 51165]]
prompt and accurate clearance and settlement of securities
transactions, including the transfer of record ownership, is necessary
for the protection of investors; inefficient procedures for clearance
and settlement impose unnecessary costs on investors; and that new data
processing and communications techniques create the opportunity for
more efficient, effective and safe procedures for clearance and
settlement.\26\ Profile accomplishes these objectives by providing a
more efficient mechanism for the movement of investors' securities
positions than the current multi-step, paper-based DRS processing.
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\26\ 15 U.S.C. 78q-1(a)(1) (A), (B), and (C).
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Participation in DRS by issuers or DRS limited participants is not
mandatory.\27\ Issues regarding risks and liabilities to issuers or
transfer agents \28\ are internal business issues and should be
addressed prior to an issuer or transfer agent's decision to
participate or participate further in DRS. On the other hand,
participation in DRS by investors is not always voluntary. Although it
was originally contemplated that shareholders would initiate their
participation by individually choosing to hold their securities as DRS
positions, DRS has developed so that in most situations issuers and
transfer agents are making the decision for investors by establishing
DRS positions on their books instead of issuing certificates. The vast
majority of shares issued to shareholders as DRS positions have been
the result of corporate actions (e.g., splits, mergers, and spin-offs)
without any election by the shareholders.
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\27\ However, once an issuer and DRS limited participant decided
to participate in DRS, use of Profile, which includes such things as
the acceptance of the electronic medallion guarantee, is required.
\28\ In their comment letters to DTC's proposed rule change,
some transfer agents contend there are business risks and liability
concerns associated with use of the Profile feature. Because
participation in DRS is not mandatory, the Commission is not
addressing these issues in this order. The Commission urges
representatives of the issuer, transfer agent, and broker-dealer
community to continue discussions to resolve the outstanding DRS
issues relative to processing and liability.
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The Concept Release indicated that although industry participants
would be free to decide for themselves whether they wanted to offer
investors the services that comprise DRS, once the service is offered,
its implementation and operation must be efficient, safe, and largely
transparent to investors.\29\ Therefore, DRS should not materially
disadvantage shareholders when compared with the current processing of
physical securities. The delays caused by requiring shareholders to
either contact the DRS limited participant directly or to send
transaction advices through the mail, as suggested by some commenters
as the preferable method to process shareholder requests for
transferring their shares to a broker, generally precludes shareholders
holding DRS positions from executing transactions on the same basis as
investors holding certificates. The use of Profile in DRS should reduce
these delays.
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\29\ Supra note 6.
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the publication of notice of
the filing of DTC's second amendment. The Commission finds good cause
for so approving the proposed rule change because Option (4) was
previously published in its entirety and the public had an opportunity
to comment on its merits. The Commission believes accelerated approval
will allow DRS participants to prepare for any operational changes that
may be necessary in light of DTC's Year 2000 shutdown date of September
15, 1999.
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, N.W., Washington, D.C. 20549-
0609. 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room, 450 Fifth Street, N.W.,
Washington, D.C. 20549. 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 No. SR-DTC-99-16 and should be
submitted by October 12, 1999.
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposal is consistent with the requirements of the Act and in
particular with the requirements of 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-99-16) be and hereby is
approved.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24495 Filed 9-20-99; 8:45 am]
BILLING CODE 8010-01-M
