Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of a Proposed Rule Change Requiring Securities be Eligible To Participate in a Direct Registration System, 47276-47278 [E6-13416]

Download as PDF 47276 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices the principal office of the abovementioned self-regulatory organization. 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 with to make available publicly. All submissions should refer to the file number in the caption above and should be submitted on or before September 6, 2006. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.19 Nancy M. Morris, Secretary. [FR Doc. E6–13400 Filed 8–15–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54288; File No. SR– NASDAQ–2006–008] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order Granting Approval of a Proposed Rule Change Requiring Securities be Eligible To Participate in a Direct Registration System August 8, 2006. I. Introduction On April 27, 2006, The NASDAQ Stock Market LLC (‘‘Nasdaq’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–NASDAQ–2006–008 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 7, 2006.2 Two comment letters were received.3 For the reasons discussed below, the Commission is granting approval of the proposed rule change.4 19 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 53913 (May 31, 2006), 71 FR 33024 (June 7, 2006) [File No. SR– NASDAQ–2006–008]. 3 Letters from Noland Cheng, Chairman, SIA Operations Committee, Securities Industry Association (June 27, 2006) and Paul Conn, President, Global Capital Markets, Computershare Limited, and Charlie Rossi, Executive Vice President, Computershare Investor Services (July 28, 2006). 4 Concurrent with the Commission’s approval of Nasdaq’s rule change, the Commission is also approving in separate orders similar rule changes proposed by the American Stock Exchange LLC (‘‘Amex’’) and the New York Stock Exchange LLC (‘‘NYSE’’). Securities Exchange Act Release Nos. 54290 (August 8, 2006) [File No. SR–Amex–2006– 40] and 54289 (August 8, 2006) [File No. SR–NYSE– 2006–29]. The Commission has also published jlentini on PROD1PC65 with NOTICES 1 15 VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 II. Description The Direct Registration System (‘‘DRS’’) allows an investor to establish either through the issuer’s transfer agent or through the investor’s broker-dealer a book-entry position on the books of the issuer and to electronically transfer her position between the transfer agent and the broker-dealer of her choice through a facility currently administered by The Depository Trust Company (‘‘DTC’’).5 DRS, therefore, enables an investor to have securities registered in her name without having a securities certificate issued to her and to electronically transfer her securities to her brokerdealer in order to effect a transaction without the risk and delays associated with the use of securities certificates. Investors holding their securities in DRS retain the rights associated with securities certificates, including such rights as control of ownership and voting rights, without having the responsibility of holding and safeguarding securities certificates. In addition, in corporate actions such as reverse stock splits and mergers, cancellation of old shares and issuance of new shares are handled electronically with no securities certificates to be returned to or received from the transfer agent. In order to reduce the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates and thereby reduce the risks, costs, and delays associated with the physical delivery of securities certificates, Nasdaq is proposing to add new Section (l) to its Rule 4350 to require that all listed securities be eligible to participate in DRS.6 While the rule change requires that issuers’ securities be eligible for DRS, it does not require issuers to participate in DRS operated by DTC and would not mandate the elimination of physical certificates. As a result, subject to applicable state law and the company’s governing documents, an investor could still elect to receive a notice of a similar rule changed proposed by NYSE Arca, Inc. Securities Exchange Act Release No. 54126 (July 11, 2006), 71 FR 40768 (July 18, 2006) [File No. SR–NYSEArca–2006–31]. 5 Currently, the only registered clearing agency operating a DRS is DTC. For a detailed description of DRS and the DRS facilities administered by DTC, see Securities Exchange Act Release Nos. 37931 (November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR–DTC–96–15] (order granting approval to establish DRS) and 41862 (September 10, 1999), 64 FR 51162 (September 21, 1999), [File No. SR–DTC–99–16] (order approving implementation of the Profile Modification System). 6 The exact text of the Nasdaq proposed rule change is set forth in its filing, which can be found at http://www.complinet.com/nasdaq/display/ display.html?rbid=1705&elementid=26. PO 00000 Frm 00114 Fmt 4703 Sfmt 4703 certificate if the issuer chose to make certificates available. Because currently the only DRS operated by a registered clearing agency is the DRS operated by DTC, in order for a security to be eligible to participate in DRS, an issuer will be required to use a transfer agent that meets DTC’s DRS transfer agent requirements, including insurance and connectivity requirements. As a result, some transfer agents acting for Nasdaq issuers may have to make changes to comply with these requirements. Certain issuers may also have to make amendments to their governing documents, such as their bylaws, to be eligible to issue securities that are not represented by certificates. To allow sufficient time for any of these changes that need to take place, Nasdaq will implement the proposed rule change January 1, 2008, for the securities of issuers with securities already listed on Nasdaq or another listed marketplace at the time the rule change is approved. Companies listing for the first time should have greater flexibility to adopt any changes required to have their securities DRS eligible, and therefore, the rule change will be applicable to new listings beginning January 1, 2007. The requirement will not apply to non-equity securities that are held in book-entry-only form. III. Comment Letters The Commission received two comment letters in support of the proposed rule change.7 The SIA Operations Committee (‘‘SIA’’), an industry organization representing broker-dealers, stated that the effect of the proposed rule change will be to reduce significantly the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates thereby reducing costs, risks, and delays associated with physical settlement. The SIA also contended that by increasing the number of DRS-eligible securities, the proposed rule change is an important step in reducing the number physical certificates, a goal the SIA has long supported in its efforts to promote immobilization and dematerialization. Computershare, a registered transfer agent, stated that the proposed rule change will help immobilize and eventually dematerialize certificates in the U.S. market, which it believes will result in benefits such as cost savings, 7 Supra note 3. The SIA and Computershare’s comment letters were written in support of the three similar proposed rule changes filed by Amex, Nasdaq, and NYSE. Supra note 4. The NYSE Arca’s proposed rule change was noticed by the Commission subsequent to the date the commenters submitted their comment letters. E:\FR\FM\16AUN1.SGM 16AUN1 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices and settlement system and has given the Commission responsibility and authority to address these issues.11 Consistent with its Congressional directives, in its efforts to improve efficiencies and decrease risks associated with processing securities transactions, the Commission has long advocated a reduction in the use of certificates in the trading environment by immobilizing or dematerializing securities and has encouraged the use of alternatives to holding securities in certificated form. Among other things, the Commission has approved the rule filings of self-regulatory organizations that require their members to use the facilities of a securities depository for the book-entry settlement of all transactions in depository-eligible securities 12 and that require any security listed for trading must be depository eligible if possible.13 More recently the Commission has approved the implementation and expansion of DRS.14 IV. Discussion Section 6(b)(5) of the Act requires, among other things, that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.8 For the reasons described below, the Commission finds that the rule change is consistent with Section 6(b)(5) of the Act. The use of securities certificates has long been identified as an inefficient and risk-laden mechanism by which to hold and transfer ownership.9 Because securities certificates require manual processing, their use can result in significant delays and expenses in processing securities transactions and present the risk of certificates being lost, stolen, or forged. Many of these costs and risks are ultimately borne by investors.10 Congress has recognized the problems and dangers that the use of certificates presents to the safe and efficient operation of the U.S. clearance jlentini on PROD1PC65 with NOTICES increased efficiency, more accurate and timely trade settlements, and reduced risk of loss for investors. Computershare noted however that some challenges remain to be overcome in the brokerdealer community before these benefits can be realized. For example, Computershare contended, among other things, that broker-dealers are not sufficiently educating their employees or their customers about the inherent risks associated with owning certificates or the benefits of owning in DRS. In addition, Computershare stated that certain current industry processing practices also need to be changed. Specifically, it believes that the industry should ‘‘default to DRS,’’ a process whereby customers of broker-dealers would obtain only a statement of their positions held on the issuer’s records rather than a certificate unless the customer contacted the issuer’s transfer agent directly to obtain a certificate. Computershare urged the Commission to review and modify current regulation to address these issues. 11 15 U.S.C. 78q–1(a)(2)(A). Congress expressly envisioned the Commission’s authority to extend to all aspects of the securities handling process involving securities transactions within the United States, including activities by clearing agencies, depositories, corporate issuers, and transfer agents. See S. Rep. No. 75, 94th Cong., 1st Sess. at 55 (1975). 12 Securities Exchange Act Release No. 32455 (June 11, 1993), 58 FR 33679 (June 18, 1993) (order approving rules requiring members, member organizations, and affiliated members of the New York Stock Exchange, National Association of Securities Dealers, American Stock Exchange, Midwest Stock Exchange, Boston Stock Exchange, Pacific Stock Exchange, and Philadelphia Stock Exchange to use the facilities of a securities depository for the book-entry settlement of all transactions in depository-eligible securities with another financial intermediary). 13 Securities Exchange Act Release No. 35798 (June 1, 1995), 60 FR 30909 (June 12, 1995), [File Nos. SR–Amex–95–17; SR–BSE–95–09; SR–CHX– 95–12; SR–NASD–95–24; SR–NYSE–95–19; SR– PSE–95–14; SR–PHLX–95–34] (order approving rules setting forth depository eligibility requirements for issuers seeking to have their shares listed on the exchange). 14 In 1996, the NYSE modified its listing criteria to permit listed companies to issue securities in book entry form provided that the issue is included in DRS. Securities Exchange Act Release No. 37937 (November 8, 1996), 61 FR 58728 (November 18, 1996), [File No. SR–NYSE–96–29]. Similarly, the NASD 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 (December 3, 1997), [File No. SR–97–51]. On July 30, 2002, the Commission approved a rule change proposed by the NYSE to amend Section 501.01 of the NYSE Listed Company Manual to allow a listed company to issue securities in a dematerialized or completely immobilized form and therefore not send stock certificates to record holders, provided the company’s stock is issued pursuant to a dividend reinvestment program, stock purchase plan, or is included in DRS. Securities Exchange Act Release No. 46282 (July 30, 2002), 67 8 15 U.S.C. 78f(b)(5). Exchange Act Release No. 49405 (March 11, 2004), 69 FR 12922 (March 18, 2004), [File No. S7–13–04] (Securities Transaction Settlement Concept Release). 10 Id. 9 Securities VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 PO 00000 Frm 00115 Fmt 4703 Sfmt 4703 47277 While the U.S. markets have made great progress in immobilization and dematerialization for institutional and broker-to-broker transactions, many industry representatives believe that the small percentage of securities held in certificated form (mostly by retail customers of broker-dealers) impose unnecessary risk and disproportionately large expense to the industry and to investors. In an attempt to address this issue, Nasdaq’s rule change, along with those of Amex and the NYSE, should help expand the use of DRS. As a result, risks, costs, and processing inefficiencies associated with the physical delivery of securities certificates should be reduced, and the perfection of the national market system should be promoted. Additionally, those investors holding securities in listed securities covered by the rule change that decide to hold their securities in DRS should realize the benefits of more accurate, quicker, and more costefficient transfers; faster distribution of sale proceeds; reduced number of lost or stolen certificates and a reduction in the associated certificate replacement costs; and consistency of owning in bookentry across asset classes. The Commission realizes that some issuers and transfer agents may bear expenses related to complying with the rule change. In order to make a security DRS-eligible, issuers of listed companies must have a transfer agent which is a DRS Limited Participants.15 In order to make an issue DRS-eligible, issuers may need to amend their corporate governing documents to permit the issuance of book-entry shares. The Commission believes, however, that the long-term benefits of increased efficiencies and reduced risks afforded by DRS outweigh the costs that some issuers and transfer agents may incur. Furthermore, the time frames built into the proposal should allow issuers sufficient time to make any necessary changes to comply with the rule change. While the propose rule change should significantly reduce the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates, the proposed rule change will not eliminate the ability of investors to obtain securities certificates after the settlement of securities transactions provided the issuer has chosen to issue certificates. Such investors can continue to contact the issuer’s transfer agent, FR 50972 (August 6, 2002), [File No. SR–NYSE– 2001–33]. 15 For a description of DTC’s rules relating to DRS Limited Participants, see Securities Exchange Act Release Nos. 37931 and 41862. Supra note 5. E:\FR\FM\16AUN1.SGM 16AUN1 47278 Federal Register / Vol. 71, No. 158 / Wednesday, August 16, 2006 / Notices either directly or through their brokerdealer, to obtain a securities certificate. Accordingly, for the reasons stated above the Commission finds that the rule change, is consistent with Nasdaq’s obligation under Section 6(b) of the Act to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. V. 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 with the requirements of Section 6(b)(5) 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– NASDAQ–2006–008) be and hereby is approved. For the Commission by the Division of Market Regulation, pursuant to delegated authority.16 Nancy M. Morris, Secretary. [FR Doc. E6–13416 Filed 8–15–06; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–54289; File No. SR–NYSE– 2006–29] Self-Regulatory Organizations; New York Stock Exchange LLC; Order Granting Approval of a Proposed Rule Change Amending the Listed Company Manual To Mandate Listed Companies To Become Eligible To Participate in a Direct Registration System jlentini on PROD1PC65 with NOTICES August 8, 2006. I. Introduction On May 6, 2006, the New York Stock Exchange LLC (‘‘NYSE’’) filed with the Securities and Exchange Commission (‘‘Commission’’) proposed rule change SR–NYSE–2006–29 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 7, 2006.2 Two comment letters 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 53912 (May 31, 2006), 71 FR 33030 (June 7, 2006) [File No. SR– NYSE–2006–29]. 1 15 VerDate Aug<31>2005 20:24 Aug 15, 2006 Jkt 208001 were received.3 For the reasons discussed below, the Commission is granting approval of the proposed rule change.4 II. Description The Direct Registration System (‘‘DRS’’) allows an investor to establish either through the issuer’s transfer agent or through the investor’s broker-dealer a book-entry position on the books of the issuer and to electronically transfer her position between the transfer agent and the broker-dealer of her choice through a facility currently administered by The Depository Trust Company (‘‘DTC’’).5 DRS, therefore, enables an investor to have securities registered in her name without having a securities certificate issued to her and to electronically transfer her securities to her brokerdealer in order to effect a transaction without the risk and delays associated with the use of securities certificates. Investors holding their securities in DRS retain the rights associated with securities certificates, including such rights as control of ownership and voting rights, without having the responsibility of holding and safeguarding securities certificates. In addition, in corporate actions such as reverse stock splits and mergers, cancellation of old shares and issuance of new shares are handled electronically with no securities certificates to be returned to or received from the transfer agent. In order to reduce the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates and thereby reduce the risks, costs, and 3 Letters from Noland Cheng, Chairman, SIA Operations Committee, Securities Industry Association (June 27, 2006) and Paul Conn, President, Global Capital Markets, Computershare Limited, and Charlie Rossi, Executive Vice President, Computershare Investor Services (July 28, 2006). 4 Concurrent with the Commission’s approval of NYSE’s rule change, the Commission is also approving in separate orders similar rule changes proposed by the American Stock Exchange LLC (‘‘Amex’’) and The NASDAQ Stock Market LLC (‘‘Nasdaq’’). Securities Exchange Act Release Nos. 54290 (August 8, 2006) [File No. SR–Amex–2006– 40] and 54288 (August 8, 2006) [File No. SR– NASDAQ–2006–008]. The Commission has also published notice of a similar rule changed proposed by NYSE Arca, Inc. Securities Exchange Act Release No. 54126 (July 11, 2006), 71 FR 40768 (July 18, 2006) [File No. SR–NYSEArca–2006–31]. 5 Currently, the only registered clearing agency operating a DRS is DTC. For a detailed description of DRS and the DRS facilities administered by DTC, see Securities Exchange Act Release Nos. 37931 (November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR–DTC–96–15] (order granting approval to establish DRS) and 41862 (September 10, 1999), 64 FR 51162 (September 21, 1999), [File No. SR–DTC–99–16] (order approving implementation of the Profile Modification System). PO 00000 Frm 00116 Fmt 4703 Sfmt 4703 delays associated with the physical delivery of securities certificates, the NYSE will impose its DRS eligibility requirement pursuant to proposed new Section 501.00 of the NYSE Listed Company Manual (‘‘Manual’’).6 Proposed Section 501.00 does not specifically require that securities must be eligible for the DRS operated by DTC. Rather it requires listed companies’ securities to be eligible for a direct registration system operated by a clearing agency, as defined in Section 3(a)(23) of the Act,7 that is registered with the Commission pursuant to Section 17A(b)(2) of the Act.8 Therefore, while the DRS currently operated by DTC is currently the only DRS facility meeting the definition, Section 501.00 will provide issuers with the option of using another qualified DRS if one should exist in the future. In order to make a security DRSeligible in the DRS currently operated by DTC, the issuer must have a transfer agent which is a DTC DRS Limited Participant.9 While some transfer agents currently acting for NYSE listed companies are already eligible to participate in DRS, other transfer agents may need to take steps to become eligible to participate in DRS. In addition, some issuers may need to amend their certificates of incorporation or by-laws to become DRS eligible. To allow sufficient time for any such necessary actions, NYSE will impose the DRS eligibility requirement in two steps. Because companies listing for the first time should have greater flexibility to conform to the eligibility requirements, proposed Section 501.00 will require all securities initially listing on NYSE on or after January 1, 2007, to be eligible for DRS at the time of listing. This provision does not extend to securities of companies (i) which already have securities listed on the NYSE, (ii) which immediately prior to such listing had securities listed on another registered securities exchange in the U.S., or (iii) which are specifically permitted under NYSE’s rules to be and which are book-entry only.10 On and after January 1, 2008, all 6 The exact text of the NYSE proposed rule change is set forth in its filing, which can be found at http://www.nyse.com/RegulationFrameset. 7 15 U.S.C. 78c(a)(23)(A). 8 15 U.S.C. 78q–1(b)(2). 9 DTC’s rules require that a transfer agent (including an issuer acting as its own transfer agent) acting for a company issuing securities in DRS must be a DRS Limited Participant. Securities Exchange Act Release No. 37931 (November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR–DTC–96– 15]. 10 Securities which the NYSE permits to be bookentry-only include all debt securities, securities E:\FR\FM\16AUN1.SGM 16AUN1

Agencies

[Federal Register Volume 71, Number 158 (Wednesday, August 16, 2006)]
[Notices]
[Pages 47276-47278]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-13416]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54288; File No. SR-NASDAQ-2006-008]


 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Order Granting Approval of a Proposed Rule Change Requiring Securities 
be Eligible To Participate in a Direct Registration System

August 8, 2006.

I. Introduction

    On April 27, 2006, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission'') proposed 
rule change SR-NASDAQ-2006-008 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 7, 2006.\2\ Two comment 
letters were received.\3\ For the reasons discussed below, the 
Commission is granting approval of the proposed rule change.\4\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 53913 (May 31, 2006), 71 
FR 33024 (June 7, 2006) [File No. SR-NASDAQ-2006-008].
    \3\ Letters from Noland Cheng, Chairman, SIA Operations 
Committee, Securities Industry Association (June 27, 2006) and Paul 
Conn, President, Global Capital Markets, Computershare Limited, and 
Charlie Rossi, Executive Vice President, Computershare Investor 
Services (July 28, 2006).
    \4\ Concurrent with the Commission's approval of Nasdaq's rule 
change, the Commission is also approving in separate orders similar 
rule changes proposed by the American Stock Exchange LLC (``Amex'') 
and the New York Stock Exchange LLC (``NYSE''). Securities Exchange 
Act Release Nos. 54290 (August 8, 2006) [File No. SR-Amex-2006-40] 
and 54289 (August 8, 2006) [File No. SR-NYSE-2006-29]. The 
Commission has also published notice of a similar rule changed 
proposed by NYSE Arca, Inc. Securities Exchange Act Release No. 
54126 (July 11, 2006), 71 FR 40768 (July 18, 2006) [File No. SR-
NYSEArca-2006-31].
---------------------------------------------------------------------------

II. Description

    The Direct Registration System (``DRS'') allows an investor to 
establish either through the issuer's transfer agent or through the 
investor's broker-dealer a book-entry position on the books of the 
issuer and to electronically transfer her position between the transfer 
agent and the broker-dealer of her choice through a facility currently 
administered by The Depository Trust Company (``DTC'').\5\ DRS, 
therefore, enables an investor to have securities registered in her 
name without having a securities certificate issued to her and to 
electronically transfer her securities to her broker-dealer in order to 
effect a transaction without the risk and delays associated with the 
use of securities certificates.
---------------------------------------------------------------------------

    \5\ Currently, the only registered clearing agency operating a 
DRS is DTC. For a detailed description of DRS and the DRS facilities 
administered by DTC, see Securities Exchange Act Release Nos. 37931 
(November 7, 1996), 61 FR 58600 (November 15, 1996), [File No. SR-
DTC-96-15] (order granting approval to establish DRS) and 41862 
(September 10, 1999), 64 FR 51162 (September 21, 1999), [File No. 
SR-DTC-99-16] (order approving implementation of the Profile 
Modification System).
---------------------------------------------------------------------------

    Investors holding their securities in DRS retain the rights 
associated with securities certificates, including such rights as 
control of ownership and voting rights, without having the 
responsibility of holding and safeguarding securities certificates. In 
addition, in corporate actions such as reverse stock splits and 
mergers, cancellation of old shares and issuance of new shares are 
handled electronically with no securities certificates to be returned 
to or received from the transfer agent.
    In order to reduce the number of transactions in securities for 
which settlement is effected by the physical delivery of securities 
certificates and thereby reduce the risks, costs, and delays associated 
with the physical delivery of securities certificates, Nasdaq is 
proposing to add new Section (l) to its Rule 4350 to require that all 
listed securities be eligible to participate in DRS.\6\ While the rule 
change requires that issuers' securities be eligible for DRS, it does 
not require issuers to participate in DRS operated by DTC and would not 
mandate the elimination of physical certificates. As a result, subject 
to applicable state law and the company's governing documents, an 
investor could still elect to receive a certificate if the issuer chose 
to make certificates available.
---------------------------------------------------------------------------

    \6\ The exact text of the Nasdaq proposed rule change is set 
forth in its filing, which can be found at http://www.complinet.com/
nasdaq/display/display.html?rbid=1705&elementid=26.
---------------------------------------------------------------------------

    Because currently the only DRS operated by a registered clearing 
agency is the DRS operated by DTC, in order for a security to be 
eligible to participate in DRS, an issuer will be required to use a 
transfer agent that meets DTC's DRS transfer agent requirements, 
including insurance and connectivity requirements. As a result, some 
transfer agents acting for Nasdaq issuers may have to make changes to 
comply with these requirements. Certain issuers may also have to make 
amendments to their governing documents, such as their by-laws, to be 
eligible to issue securities that are not represented by certificates. 
To allow sufficient time for any of these changes that need to take 
place, Nasdaq will implement the proposed rule change January 1, 2008, 
for the securities of issuers with securities already listed on Nasdaq 
or another listed marketplace at the time the rule change is approved. 
Companies listing for the first time should have greater flexibility to 
adopt any changes required to have their securities DRS eligible, and 
therefore, the rule change will be applicable to new listings beginning 
January 1, 2007. The requirement will not apply to non-equity 
securities that are held in book-entry-only form.

III. Comment Letters

    The Commission received two comment letters in support of the 
proposed rule change.\7\ The SIA Operations Committee (``SIA''), an 
industry organization representing broker-dealers, stated that the 
effect of the proposed rule change will be to reduce significantly the 
number of transactions in securities for which settlement is effected 
by the physical delivery of securities certificates thereby reducing 
costs, risks, and delays associated with physical settlement. The SIA 
also contended that by increasing the number of DRS-eligible 
securities, the proposed rule change is an important step in reducing 
the number physical certificates, a goal the SIA has long supported in 
its efforts to promote immobilization and dematerialization.
---------------------------------------------------------------------------

    \7\ Supra note 3. The SIA and Computershare's comment letters 
were written in support of the three similar proposed rule changes 
filed by Amex, Nasdaq, and NYSE. Supra note 4. The NYSE Arca's 
proposed rule change was noticed by the Commission subsequent to the 
date the commenters submitted their comment letters.
---------------------------------------------------------------------------

    Computershare, a registered transfer agent, stated that the 
proposed rule change will help immobilize and eventually dematerialize 
certificates in the U.S. market, which it believes will result in 
benefits such as cost savings,

[[Page 47277]]

increased efficiency, more accurate and timely trade settlements, and 
reduced risk of loss for investors. Computershare noted however that 
some challenges remain to be overcome in the broker-dealer community 
before these benefits can be realized. For example, Computershare 
contended, among other things, that broker-dealers are not sufficiently 
educating their employees or their customers about the inherent risks 
associated with owning certificates or the benefits of owning in DRS. 
In addition, Computershare stated that certain current industry 
processing practices also need to be changed. Specifically, it believes 
that the industry should ``default to DRS,'' a process whereby 
customers of broker-dealers would obtain only a statement of their 
positions held on the issuer's records rather than a certificate unless 
the customer contacted the issuer's transfer agent directly to obtain a 
certificate. Computershare urged the Commission to review and modify 
current regulation to address these issues.

IV. Discussion

    Section 6(b)(5) of the Act requires, among other things, that the 
rules of an exchange be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to remove impediments to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public 
interest.\8\ For the reasons described below, the Commission finds that 
the rule change is consistent with Section 6(b)(5) of the Act.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The use of securities certificates has long been identified as an 
inefficient and risk-laden mechanism by which to hold and transfer 
ownership.\9\ Because securities certificates require manual 
processing, their use can result in significant delays and expenses in 
processing securities transactions and present the risk of certificates 
being lost, stolen, or forged. Many of these costs and risks are 
ultimately borne by investors.\10\ Congress has recognized the problems 
and dangers that the use of certificates presents to the safe and 
efficient operation of the U.S. clearance and settlement system and has 
given the Commission responsibility and authority to address these 
issues.\11\
---------------------------------------------------------------------------

    \9\ Securities Exchange Act Release No. 49405 (March 11, 2004), 
69 FR 12922 (March 18, 2004), [File No. S7-13-04] (Securities 
Transaction Settlement Concept Release).
    \10\ Id.
    \11\ 15 U.S.C. 78q-1(a)(2)(A). Congress expressly envisioned the 
Commission's authority to extend to all aspects of the securities 
handling process involving securities transactions within the United 
States, including activities by clearing agencies, depositories, 
corporate issuers, and transfer agents. See S. Rep. No. 75, 94th 
Cong., 1st Sess. at 55 (1975).
---------------------------------------------------------------------------

    Consistent with its Congressional directives, in its efforts to 
improve efficiencies and decrease risks associated with processing 
securities transactions, the Commission has long advocated a reduction 
in the use of certificates in the trading environment by immobilizing 
or dematerializing securities and has encouraged the use of 
alternatives to holding securities in certificated form. Among other 
things, the Commission has approved the rule filings of self-regulatory 
organizations that require their members to use the facilities of a 
securities depository for the book-entry settlement of all transactions 
in depository-eligible securities \12\ and that require any security 
listed for trading must be depository eligible if possible.\13\ More 
recently the Commission has approved the implementation and expansion 
of DRS.\14\
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    \12\ Securities Exchange Act Release No. 32455 (June 11, 1993), 
58 FR 33679 (June 18, 1993) (order approving rules requiring 
members, member organizations, and affiliated members of the New 
York Stock Exchange, National Association of Securities Dealers, 
American Stock Exchange, Midwest Stock Exchange, Boston Stock 
Exchange, Pacific Stock Exchange, and Philadelphia Stock Exchange to 
use the facilities of a securities depository for the book-entry 
settlement of all transactions in depository-eligible securities 
with another financial intermediary).
    \13\ Securities Exchange Act Release No. 35798 (June 1, 1995), 
60 FR 30909 (June 12, 1995), [File Nos. SR-Amex-95-17; SR-BSE-95-09; 
SR-CHX-95-12; SR-NASD-95-24; SR-NYSE-95-19; SR-PSE-95-14; SR-PHLX-
95-34] (order approving rules setting forth depository eligibility 
requirements for issuers seeking to have their shares listed on the 
exchange).
    \14\ In 1996, the NYSE modified its listing criteria to permit 
listed companies to issue securities in book entry form provided 
that the issue is included in DRS. Securities Exchange Act Release 
No. 37937 (November 8, 1996), 61 FR 58728 (November 18, 1996), [File 
No. SR-NYSE-96-29]. Similarly, the NASD 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 
(December 3, 1997), [File No. SR-97-51]. On July 30, 2002, the 
Commission approved a rule change proposed by the NYSE to amend 
Section 501.01 of the NYSE Listed Company Manual to allow a listed 
company to issue securities in a dematerialized or completely 
immobilized form and therefore not send stock certificates to record 
holders, provided the company's stock is issued pursuant to a 
dividend reinvestment program, stock purchase plan, or is included 
in DRS. Securities Exchange Act Release No. 46282 (July 30, 2002), 
67 FR 50972 (August 6, 2002), [File No. SR-NYSE-2001-33].
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    While the U.S. markets have made great progress in immobilization 
and dematerialization for institutional and broker-to-broker 
transactions, many industry representatives believe that the small 
percentage of securities held in certificated form (mostly by retail 
customers of broker-dealers) impose unnecessary risk and 
disproportionately large expense to the industry and to investors. In 
an attempt to address this issue, Nasdaq's rule change, along with 
those of Amex and the NYSE, should help expand the use of DRS. As a 
result, risks, costs, and processing inefficiencies associated with the 
physical delivery of securities certificates should be reduced, and the 
perfection of the national market system should be promoted. 
Additionally, those investors holding securities in listed securities 
covered by the rule change that decide to hold their securities in DRS 
should realize the benefits of more accurate, quicker, and more cost-
efficient transfers; faster distribution of sale proceeds; reduced 
number of lost or stolen certificates and a reduction in the associated 
certificate replacement costs; and consistency of owning in book-entry 
across asset classes.
    The Commission realizes that some issuers and transfer agents may 
bear expenses related to complying with the rule change. In order to 
make a security DRS-eligible, issuers of listed companies must have a 
transfer agent which is a DRS Limited Participants.\15\ In order to 
make an issue DRS-eligible, issuers may need to amend their corporate 
governing documents to permit the issuance of book-entry shares. The 
Commission believes, however, that the long-term benefits of increased 
efficiencies and reduced risks afforded by DRS outweigh the costs that 
some issuers and transfer agents may incur. Furthermore, the time 
frames built into the proposal should allow issuers sufficient time to 
make any necessary changes to comply with the rule change.
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    \15\ For a description of DTC's rules relating to DRS Limited 
Participants, see Securities Exchange Act Release Nos. 37931 and 
41862. Supra note 5.
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    While the propose rule change should significantly reduce the 
number of transactions in securities for which settlement is effected 
by the physical delivery of securities certificates, the proposed rule 
change will not eliminate the ability of investors to obtain securities 
certificates after the settlement of securities transactions provided 
the issuer has chosen to issue certificates. Such investors can 
continue to contact the issuer's transfer agent,

[[Page 47278]]

either directly or through their broker-dealer, to obtain a securities 
certificate.
    Accordingly, for the reasons stated above the Commission finds that 
the rule change, is consistent with Nasdaq's obligation under Section 
6(b) of the Act to foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in securities, to remove 
impediments to perfect the mechanism of a free and open market and a 
national market system, and, in general, to protect investors and the 
public interest.

V. 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 with the requirements of Section 6(b)(5) 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-NASDAQ-2006-008) be and 
hereby is approved.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Nancy M. Morris,
Secretary.
[FR Doc. E6-13416 Filed 8-15-06; 8:45 am]
BILLING CODE 8010-01-P