[Federal Register: February 28, 2008 (Volume 73, Number 40)]
[Notices]
[Page 10849-10852]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28fe08-114]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57362; File No. SR-DTC-2006-16]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Amended Proposed Rule Change Amending FAST and DRS
Limited Participant Requirements for Transfer Agents
February 20, 2008.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 12, 2006, The
Depository Trust Company (``DTC'') filed with the Securities and
Exchange Commission (``Commission'') and on March 29, 2007, and May 3,
2007, amended proposed rule change No. SR-DTC-2006-16. On May 25, 2007,
the Commission published notice of the proposed rule change as amended
by Amendment 1 and Amendment 2.\2\ The Commission received 29 comment
letters to the proposed rule change as amended by Amendments 1 and
2.\3\ On December 31, 2007, DTC filed Amendment 3. The Commission is
publishing this notice to solicit comments from interested parties on
the proposed rule change as amended by Amendments 1, 2, and 3 and as
described in Items I, II, and III below, which items have been prepared
primarily by the DTC.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 34-55816 (May 25, 2007),
71 FR 30648 (June 1, 2007)[File No. SR-DTC-16].
\3\ The comment letters can be found at http://www.sec.gov/
comments/sr-dtc-2006-16/dtc200616.shtml.
\4\ The exact text of the DTC's proposed rule change can be
found at http://www.dtc.org/impNtc/mor/index.html#2006.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
DTC proposes to amend its rules to update, standardize, and restate
the requirements for the Fast Automated Securities Transfer Program
(``FAST''), to delineate the responsibilities of DTC and the transfer
agents with respect to the securities held by transfer agents as part
of the FAST program, and to restate the requirements for transfer
agents participating in the Direct Registration System (``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, the 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 these
statements.\5\
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\5\ The Commission has modified portions of the text of the
summaries prepared by the DTC.
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(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Prior to the establishment of the FAST program, transfers of
securities to or from DTC occurred by sending securities back and forth
between DTC and transfer agents. In the case of securities being
deposited with DTC, DTC sent the certificates to the transfer agent for
registration into the name of DTC's nominee, Cede & Co., and the
transfer agent returned the reregistered certificates to DTC. In the
case of securities being withdrawn from DTC, DTC sent the certificates
registered in the name of Cede & Co. to the transfer agent for
reregistration into the name designated by the withdrawing DTC
participant, and the transfer agent returned the reregistered security
to DTC for delivery to the withdrawing participant. This process
exposed securities to risk of loss during transit between DTC and
transfer agents and resulted in the expense of making physical
deliveries of securities.
Under the FAST program, transfer agents hold FAST-eligible
securities registered in the name of Cede & Co. in the form of balance
certificates. As additional securities are deposited or withdrawn from
DTC, transfer agents adjust the denomination of the balance
certificates as appropriate and electronically confirm theses changes
with DTC. Such ``FAST agents'' are holding in custody those securities
that would otherwise be held at DTC for the benefit of DTC's
participants. As such, the FAST program reduces the movement of
certificates between DTC and the transfer agents and therefore reduces
the costs and risks associated with the creation, movement, and storing
of certificates to DTC, DTC participants, issuers, and transfer
agents.\6\
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\6\ For a description of DTC's current rules relating to FAST,
see Securities Exchange Act Release Nos. 34-13342 (March 8, 1977)
[File No. SR-DTC-76-3]; 34-14997 (July 26, 1978) [File No. SR-DTC-
78-11]; 34-21401 (October 16, 1984) [File No. SR-DTC-84-8]; 34-31941
(March 3, 1993) [SR-DTC-92-15]; and 34-46956 (December 6, 2002)
[File No. SR-DTC-2002-15].
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The FAST program has grown substantially since first being
introduced in 1975.\7\ Recent changes in the rules of the major
securities exchanges are expected to further accelerate this growth.\8\
Those exchange rules require as a listing prerequisite that issues be
eligible for processing through DRS. Since becoming a FAST agent is a
criterion for a transfer agent's eligibility for participation in DRS,
DTC
[[Page 10850]]
anticipates significant growth in the FAST program.
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\7\ DTC introduced the FAST program in 1975 with 400 issues and
10 agents. Currently, there are over 930,000 issues and
approximately 90 agents in FAST.
\8\ Securities Exchange Act Release Nos. 54289 (August 8, 2006),
71 FR 47278 (August 16, 2006) [File No. SR-NYSE-2006-29]; 54290
(August 8, 2006), 71 FR 47262 (August 16, 2006) [File No. SR-Amex-
2006-40]; 54288 (August 8, 2006), 71 FR 47276 (August 16, 2006)
[File No. SR-NASDAQ-2006-08]; 54410 (September 7, 2006), 71 FR 54316
(September 14, 2006) [File No. SR-NYSE Arca-2006-31]; 55482 (March
15, 2007), 72 FR 13544 (March 22, 2007) [File No. SR-Phlx-2006-69];
55481 (March 15, 2007), 72 FR 13544 (March 22, 2007) [File No. SR-
CHX-2006-33]; and 55480 (March 15, 2007), 72 FR 13544 (March 22,
2007) [File No. SR-BSE-2006-46].
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DRS allows an investors to hold a security as the registered owner
in electronic form on the books of the transfer agent rather than
holding through the use of a certificate or holding indirectly through
a financial intermediary (e.g., a broker-dealer) that holds the
security in ``street name''. DRS also allows for the transfer of a DRS
position from the books of the transfer agent to a DTC broker-dealer
participant through the facilities of DTC using FAST.\9\
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\9\ For a description of DTC's rules relating to DRS, see
Securities Exchange Act Release Nos. 34-37931 (November 7, 1996)
[File No. SR-DTC-96-15]; 34-41862 (September 10, 1999) [File No. SR-
DTC-99-16]; 34-42366 (January 28, 2000) [File No. SR-DTC-00-01]; 34-
42704 (April 19, 2000) [File No. SR-DTC-00-04]; 34-43586 (November
17, 2000) [File No. SR-DTC-00-09]; 34-44969 (August 14, 2001) [File
No. SR-DTC-2001-07]; 34-45232 (January 3, 2002) [SR-DTC-2001-18];
34-45430 (February 11, 2002) [File No. SR-DTC-2002-01]; and 34-48885
(December 5, 2003) [File No. SR-DTC-2002-17]; 34-52422 (September
14, 2005) [File No. SR-DTC-2005-11].
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(1) Proposed Amendments to DTC's FAST Requirements
Despite the FAST program's robust past growth and expected future
growth, the transfer agent eligibility requirements for FAST have not
substantially changed since the implementation of FAST and do not: (i)
Take into account the increased volume and value of securities
processed by the transfer agents, (ii) reflect improved technology and
currently available safeguards which would enhance the safekeeping of
securities held by the transfer agents on behalf of DTC , and (iii)
require the use of standardized audit reports to certify transfer
agents' processes and controls.
In light of the FAST program's growth, DTC reexamined the
requirements of the FAST program with a view toward ensuring that DTC's
assets in the custody of transfer agents, which ultimately belong to
DTC's participants and their customers, are adequately protected. As
more fully described below, DTC has identified aspects of the FAST
program that need revising or additional requirements. The proposed
revisions and additional requirements include: (i) Insurance
requirements that take into account transaction volumes of securities
processed by transfer agents, (ii) safekeeping requirements to clarify
and to enhance security and fire protection standards and to take into
consideration technological advances that allow for economical security
improvements, and (iii) bookkeeping requirements to ensure compliance
with applicable laws and regulations and use standardized audit reports
addressing transfer agents' processes and controls.
DTC is therefore proposing to amend and to restate the minimum
requirements for transfer agents participating in the FAST program in
order to improve the safekeeping of securities transfer agents hold for
DTC and to provide better defined requirements as more transfer agents
participate in the immobilization and dematerialization of securities.
DTC's proposed minimum requirements are as follows:
1. Transfer agent must be registered with the Commission or their
appropriate regulatory authority, except where the transfer agent's
participation in the FAST program is limited to acting solely for
municipal issues (transfer agents must provide DTC with evidence of
such) and follow all applicable rules under the Exchange Act, as well
as all other applicable federal and state laws, rules, and regulations,
applicable to transfer agents, including OFAC regulations.
2. The transfer agent must execute and fulfill the requirements of
the appropriate form of ``Balance Certificate Agreement''\10\ with
DTC.\11\
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\10\ DTC currently maintains three forms of the Balance
Certificate Agreement: one for transfer agents, one for issuers
acting as their own agent, and one for parties using a processing
agent. DTC is consolidating these forms into a single form, as
attached as Exhibit 2 to its initial filing.
\11\ DTC notes that these minimum requirements incorporate by
reference the Balance Certificate Agreement between the transfer
agent and DTC.
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3. The transfer agent must sign and fulfill requirements of the
``Operational Criteria for the FAST Transfer Agent Processing''\12\ and
must comply with all applicable provisions of DTC's ``Operational
Arrangements'' (``OA''),\13\ as amended from time to time.\14\
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\12\ The Operational Criteria for the FAST Transfer Agent
Processing is attached as Exhibit 2(b) to DTC's initial filing.
\13\ For more information relating to DTC's OA, see Securities
Exchange Act Release Nos. 34-45994 (May 29, 2002), 67 FR 39452 [File
No. SR-DTC-2002-02]; 34-24818 (August 19, 1987), 52 FR 31833 [File
No. DTC-87-10]; 34-25948 (July 27, 1988), 53 FR 29294 [File No. DTC-
88-13]; 34-30625 (April 23, 1992), 57 FR 18534 [File No. DTC-92-06];
34-35649 (April 26, 1995), 60 FR 21576 [File No. DTC-94-19]; and 34-
39894 (April 21, 1998), 63 FR 23310 [File No. DTC-97-23].
\14\ DTC notes that these minimum requirements incorporate by
reference the Operational Criteria for FAST Transfer Agent
Processing and all applicable terms in DTC's Operational
Arrangements.
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4. In order to provide for the operational proficiency and
efficiency of the program, the transfer agent must complete DTC's
training on FAST functionality on being accepted as a FAST transfer
agent.
5. In order to protect against a risk of loss, the transfer agent
must carry and provide evidence of a minimum of the following standard
form Financial Institution Bond or a commercial crime policy providing
similar coverage in proportion to transaction volume the agent
processes, as follows:
a. $10 million for a transfer agent with 25,000 or fewer transfer
transactions per year as reported to the Commission;
b. $25 million for a transfer agent with over 25,000 transfer
transactions per year as reported to the Commission; and
c. In addition, the transfer agent must carry and provide evidence
of a minimum of $1 million in Errors and Omissions insurance.
In the event that a transfer agent can demonstrate that its
existing coverage and/or capitalization would provide similar
protections to DTC as the requirements set forth herein, it may apply
to DTC for a waiver. DTC shall have sole discretion as to whether or
not to grant any such waiver.
6. In order to facilitate consistent protection against losses
relating to securities in a transfer agent's control, the transfer
agent must notify DTC as soon as practicable of notice of any actual
lapse in insurance coverage or change in business practices, such as
increasing volumes or other business changes that would result in the
transfer agent requiring additional insurance coverage as outlined
above. Such notice shall be delivered to: DTC Inventory Management--1SL
55 Water Street New York, New York 10041
And with a copy to: DTC General Counsel's Office 55 Water Street--
22nd Floor New York, New York 10041.
7. The transfer agent must provide proof to DTC of any new or
substitute policy with respect to any required insurance within five
(5) days after the entry into force of such new or substitute policy.
8. The transfer agent must establish and maintain electronic
communications with DTC to balance FAST positions on a daily schedule.
9. The transfer agent must provide on an annual basis to DTC within
ten (10) business days of filing with the Commission, a copy of the
Annual Study of Evaluation of Internal Accounting Control filed with
the Commission pursuant to Exchange Act Rule 17Ad-13, attesting to the
soundness of controls to safeguard securities assets and to the
reliability and integrity of computer systems, including
confidentiality of customer accounts or other non-public information.
If a transfer agent obtains a SAS-70 audit report, the transfer agent
shall provide DTC with a copy of the
[[Page 10851]]
report within ten (10) business days of the transfer agent's receipt of
the report. If a SAS-70 audit report is not available, then the
transfer agent must provide to DTC, on an annual basis within ten (10)
business days of filing with the Commission an accountant's report
(pursuant to Exchange Act Rule 17Ad-13, Annual Study of Evaluation of
Internal Accounting Controls), a SSAE-10 report from an external
certified public accountant (or an equivalent report) attesting to the
soundness of the transfer agent's controls relating to FAST.
10. FAST agents must safeguard all the securities assets as stated
under Exchange Act Rule 17Ad-12, with at a minimum the following
additional DTC requirements:
a. maintain a theft and fire central monitoring alarm system
protecting the entire premises and
b. maintain all certificates in a vault, safe, or other secure
location, accessible only by authorized personnel.
11. Personnel with access to the safe and the codes for the
centralized monitoring system must comply with Exchange Act Rule 17f-2,
which includes but is not limited to rules for fingerprinting staff
that physically handle certificates.
12. Unless prohibited by applicable law, the transfer agent when
applying to be a FAST agent must provide DTC with a copy of the two
most recent deficiency or compliance correspondences from the
Commission as well as any follow-up correspondences. In addition,
unless prohibited by applicable law, the transfer agent on an ongoing
basis must provide DTC with notice of any alleged material deficiencies
documented by the Commission that may affect the activities of the
transfer agent as a FAST Agent within five (5) business days of the
transfer agent being notified of such material deficiencies.
13. Unless prohibited by applicable law, during regular business
hours and upon advance notice, DTC reserves the right to visit and
inspect, to the extent such visits and inspections pertain to DTC's
position, the transfer agent's facilities, books, and records. DTC,
however, is not obligated to conduct such visits or inspections.
14. Existing FAST agents shall have a period of six (6) months from
the date of the Commission's approval of this rule filing to comply
with these requirements, including the submission to DTC of a signed
Balance Certificate Agreement, signed Operational Criteria, and all
supporting documentation referenced herein. If an agent is not
compliant with these requirements upon the expiration of such period,
DTC shall have the right, using its sole discretion, to terminate or to
continue the agent's FAST status.
15. An agent acting on behalf of a transfer agent or an issuer
acting on its own behalf shall have the same rights and
responsibilities under these requirements as if it were the transfer
agent.
(2) Proposed Amended and Restated Eligibility Requirements for DRS
Limited Participants
DTC is proposing the following restatement of the eligibility
requirements for DRS Limited Participants\15\ and the DRS eligibility
requirements for DRS issues to promote consistency with the FAST
program requirements as well as to further ensure the soundness of the
DRS system.
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\15\ DRS Limited Participants are transfer agents that
participate in DRS through DTC. They are bound to certain provisions
of the DTC rules. Securities Exchange Act Release No. 34-37931
(November 7, 1996) [File No. SR-DTC-96-15].
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In order to be eligible to be a DRS Limited Participant, a transfer
agent must:
1. Participate in the FAST program and abide by DTC's requirements
governing participation in the FAST program, which requirements are
proposed to be amended by this filing;
2. Execute a DTC Limited Participant Account agreement;
3. Deliver transaction advices directly to investors relating to
DRS Withdrawal-by-Transfer requests and provide DTC with a file
containing the information required by DTC (which must include, among
other things, the transaction advice delivery date) in a format and
using functionality as specified by DTC from time to time;
4. Complete DTC's training program on DRS and Profile Modification
System (``Profile'') functionality;
5. Participate in the Profile surety or insurance program to
initiate Profile transactions;\16\
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\16\ In DRS, instructions to transfer shares are sent by a
broker-dealer that is a DTC Participant or a by a transfer agent
that is a DRS Limited Participant through Profile. Profile provides
screen based indemnification against false instructions from the
party submitting the instructions through DRS. The indemnity is
supported by either a surety bond or an insurance policy.
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6. Implement program changes related to DTC internal systems
modifications within a reasonable time upon receiving notification from
DTC of such modifications;
7. Implement program changes to support and expand DRS processing
capabilities as agreed to by the DRS Ad Hoc Committee; and
8. Existing DRS Limited Participants shall have a period of six (6)
months from the date of the Commission's approval of this rule filing
within which they must comply with these requirements. If an agent is
not compliant with these requirements upon the expiration of such
period, DTC shall have the right using its sole discretion to terminate
or to continue the agent's status as a DRS Limited Participant.
(3) Eligibility Requirements for DRS Issues
In order for an issue to be eligible as a DRS issue, the issue
must:
1. Have a transfer agent accepted as a DTC DRS Limited Participant;
2. Be included in the FAST program (An issue may not be added to
DRS if an ``out of balance'' position exists.)
(4) DTC's Proposed Standard of Care Obligations With Respect to FAST
DTC is proposing to establish a clearer demarcation of
responsibility and liability with respect to the FAST program.
Historically, DTC believes the Commission has left to user-governed
clearing agencies the question of how to allocate losses associated
with, among other things, clearing agency functions.\17\ In conjunction
with its approval of these standards, the Commission noted that while
it had ``called on registered clearing agencies to undertake, by rule,
to deliver all fully-paid securities in their control to, or as
directed by, the participant for whom the securities are held,'' given
that registered clearing agencies had demonstrated a high level of
responsibility in safeguarding securities and funds, a standard of care
based on a strict standard of liability was not required either with
respect to failures of the clearing agency or a sub-custodian. DTC
notes that securities in the FAST program are held by a transfer agent
and are not within the immediate custody and control of DTC. As such,
after a transfer agent is accepted to the FAST program, DTC is
proposing the addition of a clarifying provision to Rule 6 to state
that DTC will not be liable for the acts or omissions of FAST Agents or
other third parties, unless caused directly by DTC's gross negligence,
willful misconduct, or violation of federal securities laws for which
there is a private right of action.
[[Page 10852]]
In addition, DTC proposes that under no circumstance shall DTC be
liable for selecting or accepting any third party as an agent of DTC,
including a transfer agent participating in the FAST Program.
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\17\ Securities Exchange Act Release Nos. 34-20221 (September
23, 1983) and 34-22940 (February 24, 1986). In this regard, DTC
adopted a uniform standard with respect to certain of its
procedures, or Service Guides, such that DTC is not liable for any
loss incurred by a participant other than one caused directly by
gross negligence or willful misconduct on the part of DTC. See
Securities Exchange Act Release No. 34-44719 (August 17, 2001) [File
No. SR-DTC-2001-01].
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DTC believes the proposed rule change is consistent with the
requirements of Section 17A of the Act, as amended,\18\ and the rules
and regulations thereunder because it improves standards relating to
the eligibility of transfer agents and issues for its FAST and DRS
programs. As such, it assures the safeguarding of securities and funds
which are in the custody or control of DTC or for which it is
responsible.
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\18\ 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 that is 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
DTC has neither solicited nor received written comments on the
proposed rule change.\19\
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\19\ The Commission received 29 comment letters to DTC's
proposed rule change as amended by Amendments 1 and 2. The comment
letters can be found at http://www.sec.gov/comments/sr-dtc-2006-16/
dtc200616.shtml.
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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, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml) or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-DTC-2006-16 in the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2006-16. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). 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, 100 F Street,
NE., Washington, DC 20549 on official business days between the hours
of 10 a.m. and 3:30 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of the DTC and on
the DTC's Web site, http://www.dtcc.com. All comments received will be
posted without change; the Commission does not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File Number SR-DTC-2006-16 and should be submitted on
or before March 20, 2008.
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E8-3730 Filed 2-27-08; 8:45 am]
BILLING CODE 8011-01-P