Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Granting Approval of a Proposed Rule Change Amending Rules Relating to the Direct Registration System, 13547-13549 [E7-5189]

Download as PDF Federal Register / Vol. 72, No. 55 / Thursday, March 22, 2007 / Notices rwilkins on PROD1PC63 with NOTICES Consistent with its Congressional directives and 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 immobilization or dematerialization of 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 13 and that require any security listed for trading must be depository eligible if possible.14 More recently the Commission has approved the implementation and expansion of DRS.15 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 (held mostly by retail See S. Rep. No. 75, 94th Cong., 1st Sess. at 55 (1975). 13 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). 14 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). 15 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 NYSE 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 or a stock purchase plan or is included in a DRS. Securities Exchange Act Release No. 46282 (July 30, 2002), 67 FR 50972 (August 6, 2002), [File No. SR–NYSE–2001–33]. VerDate Aug<31>2005 16:11 Mar 21, 2007 Jkt 211001 investors) impose unnecessary risk and disproportionately large expense to the industry and to investors. In an attempt to help address this issue, CHX’s rule change, along with those of the NYSE, Amex, Nasdaq, NYSE Arca, BSE, and Phlx, should help expand the use of DRS. As a result, risks, costs, and processing inefficiencies associated with the use of securities certificates should be reduced, and impediments to the perfection of the national market system should be removed. Additionally, those investors holding securities in listed securities certificates 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 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 an issue DRS-eligible, issuers of listed companies must have a transfer agent which is a DRS Limited Participants and 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 costs and 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 and their transfer agents sufficient time to make any necessary changes to comply with the rule change. While the rule change should significantly reduce the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates, it will not eliminate the ability of investors to obtain securities certificates provided the issuer has chosen to issue certificates. Such investors can continue to contact the issuer’s transfer agent, 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 CHX’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 PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 13547 general to protect investors and the public interest.16 IV. 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–CHX–2006–33) be and hereby is approved. For the Commission by the Division of Market Regulation, pursuant to delegated authority.17 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–5191 Filed 3–21–07; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–55482; File No. SR–Phlx– 2006–69] Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Granting Approval of a Proposed Rule Change Amending Rules Relating to the Direct Registration System March 15, 2007. I. Introduction On October 31, 2006, the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’) filed with the Securities and Exchange Commission (‘‘Commission’’) and on November 14, 2006, amended proposed rule change SR–Phlx–2006–69 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 December 7, 2006.2 No comment letters were received. For the reasons discussed below, the Commission is granting approval of the proposed rule change.3 16 In approving the proposed rule change, the Commission considered the proposal’s impact on the efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 17 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 Securities Exchange Act Release No. 54834 (November 29, 2006), 71 FR 71013 (December 7, 2006) [File No. SR–Phlx–2006–69]. 3 Concurrent with this order, the Commission is approving similar rule changes submitted by the Boston Stock Exchange, Inc., and Chicago Stock Exchange, Inc. Securities Exchange Act Release Nos. 54832 (November 29, 2006), 71 FR 71000 (December 7, 2006) [File No. SR–BSE–2006–46] and 54833 (November 29, 2006), 71 FR 71004 (December 7, 2006) [File No. SR–CHX–2006–33]. E:\FR\FM\22MRN1.SGM Continued 22MRN1 13548 Federal Register / Vol. 72, No. 55 / Thursday, March 22, 2007 / Notices rwilkins on PROD1PC63 with NOTICES 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’’).4 DRS, therefore, enables an investor to have securities registered in her name on the books of the issuer 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, expenses, 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 risks, costs, and delays associated with the use of securities certificates, new Phlx Rule 868 will require that certain securities be eligible for DRS.5 Rule 868 will require that on or after January 1, 2007, all securities initially listing on Phlx must be eligible for a DRS operated by a securities depository that is a clearing agency registered under Section 17A of the Act (‘‘securities depository’’). This The Commission has also granted approval to similar rule changes submitted by the New York Stock Exchange LLC (‘‘NYSE’’), American Stock Exchange LLC (‘‘Amex’’), The NASDAQ Stock Market LLC (‘‘Nasdaq’’), and the NYSE Arca, Inc. (‘‘NYSE Arca’’). 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]. 4 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). 5 The text of Phlx Rule 868 is set forth in its filing, which can be found at http://www.phlx.com/ exchange/rulefilngs/2006/S–2006–69.pdf. VerDate Aug<31>2005 16:11 Mar 21, 2007 Jkt 211001 provision will not extend to (i) Securities of companies which already have securities listed on Phlx; (ii) securities of companies which immediately prior to such listing had securities listed on another national securities exchange; (iii) derivative products,6 or (iv) securities (other than stocks) which are book-entry-only. Rule 868 will also require that on or after January 1, 2008, all securities listed on the Phlx must be eligible for a DRS operated by a securities depository. This provision will not extend to derivative products or securities (other than stocks) that are book-entry-only. Issuers and their transfer agents may incur initial costs when making an issue DRS-eligible as required by this rule change. In order to make a security DRSeligible, the issuer must have a transfer agent which is a DRS Limited Participant at DTC.7 Transfer agents will need to meet certain DTC criteria, such as insurance and connectivity requirements, in order to become a DRS Limited Participant. Further, issuers may need to amend their corporate documents, such as their by-laws or charter, in order to permit the issuance of book-entry shares. Phlx believes that the deadlines for DRS eligibility coupled with instructive communication by Phlx to issuers, allows issuers sufficient time to make the necessary changes to comply with the rule. III. 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 6 For purposes of proposed Rule 868, the term ‘‘derivative products’’ means standardized options issued by The Options Clearing Corporation (‘‘OCC’’) or other securities that are issued by OCC or another limited purpose entity or trust and that are based solely on the performance of an index or portfolio of other publicly traded securities. The term ‘‘derivative product’’ does not include warrants of any type or closed-end management investment companies. 7 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]. PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 investors and the public interest.8 For the reasons described below, the Commission finds that Phlx’s 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 presents the risk of certificates being lost or stolen. 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 the responsibility and the authority to address these issues.11 Consistent with its Congressional directives and 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 immobilization or dematerialization of 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 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. 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 of 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– 9 Securities E:\FR\FM\22MRN1.SGM 22MRN1 Federal Register / Vol. 72, No. 55 / Thursday, March 22, 2007 / Notices rwilkins on PROD1PC63 with NOTICES recently the Commission has approved the implementation and expansion of DRS.14 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 (held mostly by retail investors) impose unnecessary risk and disproportionately large expense to the industry and to investors. In an attempt to help address this issue, Phlx’s rule change, along with those of the NYSE, Amex, Nasdaq, NYSE Arca, BSE, and CHX, should help expand the use of DRS. As a result, risks, costs, and processing inefficiencies associated with the use of securities certificates should be reduced, and impediments to the perfection of the national market system should be removed. Additionally, those investors holding securities in listed securities certificates 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 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 an issue DRS-eligible, issuers of listed companies must have a transfer agent which is a DRS Limited Participants and may need to amend their corporate governing documents to permit the issuance of 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 NYSE 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 or a stock purchase plan or is included in a DRS. Securities Exchange Act Release No. 46282 (July 30, 2002), 67 FR 50972 (August 6, 2002), [File No. SR–NYSE–2001–33]. VerDate Aug<31>2005 16:11 Mar 21, 2007 Jkt 211001 book-entry shares. The Commission believes, however, that the long-term benefits of increased efficiencies and reduced costs and 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 and their transfer agents sufficient time to make any necessary changes to comply with the rule change. While the rule change should significantly reduce the number of transactions in securities for which settlement is effected by the physical delivery of securities certificates, it will not eliminate the ability of investors to obtain securities certificates provided the issuer has chosen to issue certificates. Such investors can continue to contact the issuer’s transfer agent, 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 Phlx’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.15 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–Phlx–2006–69) be and hereby is approved. For the Commission by the Division of Market Regulation, pursuant to delegated authority.16 Florence E. Harmon, Deputy Secretary. [FR Doc. E7–5189 Filed 3–21–07; 8:45 am] BILLING CODE 8010–01–P 15 In approving the proposed rule change, the Commission considered the proposal’s impact on the efficiency, competition, and capital formation. 15 U.S.C. 78c(f). 16 17 CFR 200.30–3(a)(12). PO 00000 Frm 00082 Fmt 4703 Sfmt 4703 13549 SMALL BUSINESS ADMINISTRATION Buffalo District Advisory Council; Notice of Federal Advisory Committee Management Meeting The U.S. Small Business Administration Buffalo District Advisory Council located in the geographical area of Buffalo, New York, will hold a public Federal advisory meeting on Wednesday, April 18, 2007, starting at 10 a.m. EST. The meeting will take place at the SBA Disaster Assistance Customer Service Center, located at 130 S. Elmwood Avenue, 5th Floor, Buffalo, New York. The purpose of the meeting is to discuss the following topics: (1) FY 2007 Mid-year report; (2) SBA Program updates; (3) SBA’s Military Reservist Economic Injury Disaster Loan (MREIDL); (4) Disaster Assistance Customer Service Center Tour and Update; (5) District Small Business Week; (6) District SBA Business Matchmaking, Awards Luncheon & Expo; (7) Roundtable Discussion on Small Business Issues. Anyone wishing to make an oral presentation to the Board must contact Franklin J. Sciortino, District Director, Buffalo District Office, in writing by letter or fax no later than Friday, March 30, 2007, in order to be put on the agenda. Franklin J. Sciortino, District Director, Buffalo District Office, U.S. Small Business Administration, Niagara Center, 540 Niagara Center, 130 S. Elmwood Avenue, Buffalo, New York 14202; telephone (716) 551–4301 or fax (716) 551–4418. Matthew Teague, Committee Management Officer. [FR Doc. E7–5222 Filed 3–21–07; 8:45 am] BILLING CODE 8025–01–P DEPARTMENT OF STATE [Public Notice 5727] Formation of the United States Delegation to the World Radiocommunication Conference: Request for Expressions of Interest in Being on the United States Delegation Summary: The International Telecommunication Union (ITU) World Radiocommunication Conference (WRC) will take place from October 22– November 16, 2007 in Geneva, Switzerland. As part of the preparations for the formation of the United States delegation to the World Radiocommunication Conference, the Department of State is requesting E:\FR\FM\22MRN1.SGM 22MRN1

Agencies

[Federal Register Volume 72, Number 55 (Thursday, March 22, 2007)]
[Notices]
[Pages 13547-13549]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-5189]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55482; File No. SR-Phlx-2006-69]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval of a Proposed Rule Change Amending Rules 
Relating to the Direct Registration System

March 15, 2007.

I. Introduction

    On October 31, 2006, the Philadelphia Stock Exchange, Inc. 
(``Phlx'') filed with the Securities and Exchange Commission 
(``Commission'') and on November 14, 2006, amended proposed rule change 
SR-Phlx-2006-69 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 December 7, 2006.\2\ No comment letters were 
received. For the reasons discussed below, the Commission is granting 
approval of the proposed rule change.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 54834 (November 29, 
2006), 71 FR 71013 (December 7, 2006) [File No. SR-Phlx-2006-69].
    \3\ Concurrent with this order, the Commission is approving 
similar rule changes submitted by the Boston Stock Exchange, Inc., 
and Chicago Stock Exchange, Inc. Securities Exchange Act Release 
Nos. 54832 (November 29, 2006), 71 FR 71000 (December 7, 2006) [File 
No. SR-BSE-2006-46] and 54833 (November 29, 2006), 71 FR 71004 
(December 7, 2006) [File No. SR-CHX-2006-33]. The Commission has 
also granted approval to similar rule changes submitted by the New 
York Stock Exchange LLC (``NYSE''), American Stock Exchange LLC 
(``Amex''), The NASDAQ Stock Market LLC (``Nasdaq''), and the NYSE 
Arca, Inc. (``NYSE Arca''). 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].

---------------------------------------------------------------------------

[[Page 13548]]

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'').\4\ DRS, 
therefore, enables an investor to have securities registered in her 
name on the books of the issuer 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, 
expenses, and delays associated with the use of securities 
certificates.
---------------------------------------------------------------------------

    \4\ 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 risks, costs, and delays associated with the 
use of securities certificates, new Phlx Rule 868 will require that 
certain securities be eligible for DRS.\5\ Rule 868 will require that 
on or after January 1, 2007, all securities initially listing on Phlx 
must be eligible for a DRS operated by a securities depository that is 
a clearing agency registered under Section 17A of the Act (``securities 
depository''). This provision will not extend to (i) Securities of 
companies which already have securities listed on Phlx; (ii) securities 
of companies which immediately prior to such listing had securities 
listed on another national securities exchange; (iii) derivative 
products,\6\ or (iv) securities (other than stocks) which are book-
entry-only.
---------------------------------------------------------------------------

    \5\ The text of Phlx Rule 868 is set forth in its filing, which 
can be found at http://www.phlx.com/exchange/rulefilngs/2006/S-2006-
69.pdf.
    \6\ For purposes of proposed Rule 868, the term ``derivative 
products'' means standardized options issued by The Options Clearing 
Corporation (``OCC'') or other securities that are issued by OCC or 
another limited purpose entity or trust and that are based solely on 
the performance of an index or portfolio of other publicly traded 
securities. The term ``derivative product'' does not include 
warrants of any type or closed-end management investment companies.
---------------------------------------------------------------------------

    Rule 868 will also require that on or after January 1, 2008, all 
securities listed on the Phlx must be eligible for a DRS operated by a 
securities depository. This provision will not extend to derivative 
products or securities (other than stocks) that are book-entry-only.
    Issuers and their transfer agents may incur initial costs when 
making an issue DRS-eligible as required by this rule change. In order 
to make a security DRS-eligible, the issuer must have a transfer agent 
which is a DRS Limited Participant at DTC.\7\ Transfer agents will need 
to meet certain DTC criteria, such as insurance and connectivity 
requirements, in order to become a DRS Limited Participant. Further, 
issuers may need to amend their corporate documents, such as their by-
laws or charter, in order to permit the issuance of book-entry shares. 
Phlx believes that the deadlines for DRS eligibility coupled with 
instructive communication by Phlx to issuers, allows issuers sufficient 
time to make the necessary changes to comply with the rule.
---------------------------------------------------------------------------

    \7\ 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].
---------------------------------------------------------------------------

III. 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 Phlx's 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 presents the risk of 
certificates being lost or stolen. 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 the responsibility and the 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 of 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 and 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 immobilization 
or dematerialization of 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

[[Page 13549]]

recently the Commission has approved the implementation and expansion 
of DRS.\14\
---------------------------------------------------------------------------

    \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 NYSE 
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 or a stock purchase plan or is 
included in a 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 (held mostly by 
retail investors) impose unnecessary risk and disproportionately large 
expense to the industry and to investors. In an attempt to help address 
this issue, Phlx's rule change, along with those of the NYSE, Amex, 
Nasdaq, NYSE Arca, BSE, and CHX, should help expand the use of DRS. As 
a result, risks, costs, and processing inefficiencies associated with 
the use of securities certificates should be reduced, and impediments 
to the perfection of the national market system should be removed. 
Additionally, those investors holding securities in listed securities 
certificates 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 an issue DRS-eligible, issuers of listed companies must have a 
transfer agent which is a DRS Limited Participants and 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 costs and 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 and their transfer agents sufficient time to make any 
necessary changes to comply with the rule change.
    While the rule change should significantly reduce the number of 
transactions in securities for which settlement is effected by the 
physical delivery of securities certificates, it will not eliminate the 
ability of investors to obtain securities certificates provided the 
issuer has chosen to issue certificates. Such investors can continue to 
contact the issuer's transfer agent, 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 Phlx'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.\15\
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    \15\ In approving the proposed rule change, the Commission 
considered the proposal's impact on the efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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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-Phlx-2006-69) be and hereby is approved.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-5189 Filed 3-21-07; 8:45 am]
BILLING CODE 8010-01-P