Self-Regulatory Organizations; The Depository Trust Company; Order Granting Approval of a Proposed Rule Change as Amended Relating to FAST and DRS Limited Participant Requirements for Transfer Agents, 33496-33503 [E9-16455]
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Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices
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previously approved a structure in
which certain committees of the board
of directors of NYSE Euronext,
including the audit and compensation
committees, were authorized to perform
functions for various subsidiaries,
including the New York Stock
Exchange, LLC (‘‘NYSE’’).8
The BX Audit Committee. Currently,
the BX audit committee is primarily
charged with: (1) Overseeing BX’s
financial reporting process; (2)
overseeing the systems of internal
controls established by management and
the BX board, as well as the legal and
compliance process; (3) selection and
evaluation of independent auditors; and
(4) direction and oversight of the
internal audit function. BX states that
the NASDAQ OMX audit committee 9
will assume the duties currently
performed by the BX audit committee
once that committee is eliminated. The
Exchange states that the responsibilities
of BX’s audit committee are fully
duplicated by the responsibilities of the
NASDAQ OMX audit committee.10 In
addition, BX states that its regulatory
oversight committee has broad authority
to oversee the adequacy and
effectiveness of BX’s regulatory and selfregulatory organization responsibilities,
and therefore is able to maintain
oversight over internal controls in
tandem with the NASDAQ OMX audit
committee. Further, BX states that the
practice of NASDAQ OMX’s Internal
Audit Department (‘‘Department’’),11
8 Securities Exchange Act Release No. 55293
(February 14, 2007), 72 FR 8033 (February 22, 2007)
(SR–NYSE–2006–120).
9 The NASDAQ OMX audit committee is
composed of four or five directors, all of whom
must be independent under the standards
established by Section 10A(m) of the Act and the
listing rules of The NASDAQ Stock Market LLC. All
committee members must be able to read and
understand financial statements, and at least one
member must have past employment experience in
finance or accounting, requisite professional
certification in accounting, or any other comparable
experience or background that results in the
individual’s financial sophistication.
10 Specifically, BX states that: the NASDAQ OMX
audit committee has broad authority to review the
financial information that will be provided to
shareholders and others, systems of internal
controls, and audit, financial reporting and legal
and compliance processes and, because NASDAQ
OMX’s financial statements are prepared on a
consolidated basis that includes the financial
results of NASDAQ OMX’s subsidiaries, including
BX, the NASDAQ OMX audit committee’s purview
necessarily includes these subsidiaries. In addition,
BX states that the NASDAQ OMX audit committee
currently is charged with providing oversight over
financial reporting and independent auditor
selection for NASDAQ OMX and all of its
subsidiaries, including BX, and the NASDAQ OMX
audit committee has general responsibility for
oversight over internal controls and direction and
oversight over the internal audit function for
NASDAQ OMX and all of its subsidiaries. See
Notice, 74 FR at 23460.
11 See Notice, 74 FR at 23460–61.
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which performs internal audit functions
for all NASDAQ OMX subsidiaries, is to
report to the BX regulatory oversight
committee on all internal audit matters
relating to BX, which will be formally
reflected in the Department’s written
procedures. BX also represents that, to
ensure that the BX board retains
authority to direct the Department’s
activities with respect to BX, the
Department’s written procedures will be
amended to stipulate that the BX
regulatory oversight committee may, at
any time, direct the Department to
conduct an audit of a matter of concern
to it and report the results of the audit
both to the BX regulatory oversight
committee and the NASDAQ OMX audit
committee.12
BX Management Compensation
Committee. BX also proposes to
eliminate its compensation committee,
and to prescribe that the functions of
that committee be performed by the
NASDAQ OMX compensation
committee or the full BX board, when
required. The NASDAQ OMX By-Laws
provide that its compensation
committee considers and recommends
compensation policies, programs, and
practices for employees of NASDAQ
OMX. According to BX, many
employees performing work for BX are
also employees of NASDAQ OMX, and
certain senior officers of BX are also
officers of NASDAQ OMX and other
NASDAQ OMX subsidiaries because
their responsibilities relate to multiple
entities within the NASDAQ OMX
corporate structure.13 As a result,
NASDAQ OMX establishes
compensation and compensation policy
for these employees.
To the extent that policies, programs,
and practices must be established for
any BX officers or employees who are
not also NASDAQ OMX officers or
employees, BX states that the BX Board
will perform such actions without the
use of a compensation committee,
subject to recusal by Staff Directors,14
unless the persons in question are also
12 See
Notice, 74 FR at 23461.
13 Id.
14 See BX By-Laws Article I(t). Staff Directors are
directors of BX that are also serving as officers.
Because the BX board would not be responsible for
setting the compensation of any Staff Directors who
are also officers of NASDAQ OMX, these directors
would be permitted to participate in discussions
concerning compensation of BX employees, but BX
states that they must recuse themselves from a vote
on the subject to allow the determination to be
made by directors that are not officers or employees
of BX. BX also states that, if a Staff Director is not
also an employee of NASDAQ OMX, that Staff
Director must also absent himself or herself from
any deliberations regarding his or her
compensation.
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employees of Boston Options Exchange
Regulation LLC (‘‘BOXR’’).15
The Commission notes that the
proposed elimination of the BX audit
and management compensation
committees is comparable to a structure
for the NYSE that the Commission
previously considered and approved.16
The Commission finds that the
proposed elimination of the BX’s audit
and management compensation
committees is consistent with the
Exchange Act.
II. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,17 that the
proposed rule change (SR–BX–2009–
021) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.18
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–16450 Filed 7–10–09; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60196; File No. SR–DTC–
2006–16]
Self-Regulatory Organizations; The
Depository Trust Company; Order
Granting Approval of a Proposed Rule
Change as Amended Relating to FAST
and DRS Limited Participant
Requirements for Transfer Agents
June 30, 2009.
I. Introduction
On October 12, 2006, The Depository
Trust Company (‘‘DTC’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) proposed rule change
SR–DTC–2006–16 pursuant to Section
19(b)(1) of the Securities Exchange Act
15 BOXR is the subsidiary of BX that has been
delegated responsibility to regulate the market
operated by Boston Options Exchange Group LLC
(‘‘BOX’’), an options exchange that is a facility of
BX but in which neither BX nor any of its affiliates
has a financial interest. Section 17 of the By-Laws
of BOXR (which are part of its Limited Liability
Company Agreement) provides that the
compensation of BOXR’s officers shall be
determined by the BOXR Board. Because of BOXR’s
special status as a regulatory subsidiary, this
provision will remain operative following the
implementation of the rule change proposed by this
filing. The Commission notes that, under the ByLaws, BX’s regulatory oversight committee must be
informed about the compensation and promotion or
termination of the BX chief regulatory officer and
the reasons therefor, to allow it to provide oversight
over decisions affecting this key officer. See BX ByLaws Section 4.13(e).
16 See supra note 8.
17 15 U.S.C. 78s(b)(2).
18 17 CFR 200.30–3(a)(12).
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Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices
of 1934 (‘‘Act’’).1 On March 29, 2007,
and May 3, 2007, DTC filed
amendments to the proposed rule
change. On May 25, 2007, the
Commission published notice of the
proposed rule change as amended by
Amendment 1 and Amendment 2.2 On
December 31, 2007, DTC again filed an
amendment. Notice of the amended
proposal was published in the Federal
Register on February 20, 2007.3 On June
23, 2008, DTC again filed an
amendment. Notice of the amended
proposed rule change was published in
the Federal Register on June 19, 2008.4
The Commission received 47 comment
letters in total to the proposed rule
change.5 For the reasons discussed
below, the Commission is granting
approval of the proposed rule change, as
amended.
II. Description
Prior to the establishment of DTC’s
Fast Automated Securities Transfer
program (‘‘FAST’’), transfers of
securities to or from DTC on behalf of
its participants occurred by sending
securities certificates back and forth
between DTC and transfer agents. In the
case of securities being deposited with
DTC, DTC sent the certificates received
by its participants 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
participant, and the transfer agent
returned a reregistered security
certificate to DTC for delivery to the
withdrawing participant or delivered
the reregistered security certificate to
another entity as directed and sent a
security certificate to DTC representing
the remainder of DTC’s position. The
process of physically transporting
securities certificates between DTC and
transfer agents exposed DTC, its
participants, and the transfer agents to
the risk of loss during transit and
resulted in significant expenses.
DTC’s FAST program was designed to
eliminate some of the risks and costs
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1 15
U.S.C. 78s(b)(1).
2 Securities Exchange Act Release No. 55816 (May
25, 2007), 71 FR 30648 (June 1, 2007).
3 Securities Exchange Act Release No. 57362
(February 20, 2008), 73 FR 10849 (February 28,
2008).
4 Securities Exchange Act Release No. 57959
(June 12, 2008), 73 FR 57959 (June 19, 2008).
5 Infra note 22. The comment letters can be found
at https://www.sec.gov/comments/sr-dtc-2006-16/
dtc200616shtml.
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related to this production and
transportation of securities certificates.
Under the FAST program, transfer
agents hold FAST eligible securities in
the name of Cede & Co. for the benefit
of DTC.6 As additional securities are
deposited or withdrawn from DTC,
transfer agents adjust the size of DTC’s
position as appropriate and
electronically confirm theses changes
with DTC. Transfer agents acting as
‘‘FAST agents’’ are holding in custody
for DTC those securities that would
otherwise be held at DTC. 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 for issuers, transfer agents,
broker-dealers, and DTC.
The FAST program has grown
substantially since first being
introduced in 1975.7 Recently all the
major securities exchanges have made
changes to the listing requirements to
require companies to make their
securities eligible to participate in the
Direct Registration System (‘‘DRS’’).8
Because FAST eligibility is a
prerequisite to an issue being eligible for
DRS, DTC expects that the number of
FAST eligible securities will continue to
expand.9 Furthermore, because being a
FAST agent is a criterion for a transfer
agent’s eligibility for participation in
6 For a description of DTC’s current rules relating
to FAST, refer to Securities Exchange Act Release
Nos. 13342 (March 8, 1977) [File No. SR–DTC–76–
3]; 14997 (July 26, 1978) [File No. SR–DTC–78–11];
21401 (October 16, 1984) [File No. SR–DTC–84–8];
31941 (March 3, 1993) [SR–DTC–92–15]; and 46956
(December 6, 2002) [File No. SR–DTC–2002–15].
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 DRS provides an investor with the ability to
register her securities in her own name on the
issuer’s records and to efficiently transfer by bookentry movements her securities positions to her
broker-dealer rather than holding a physical
certificate or holding indirectly through a financial
intermediary (e.g., a broker-dealer) in ‘‘street
name.’’ DRS also allows for the transfer of a DRS
position from the books of the issuer to the account
of a DTC broker-dealer participant and vice versa
through the facilities of DTC using FAST.
9 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 13547
(March 22, 2007) [File No. SR–Phlx–2006–69];
55481 (March 15, 2007), 72 FR 13546 (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, DTC anticipates significant growth
in the number of FAST agents.10
As a result of discussions with
industry representatives, including
transfer agents, broker-dealers, issuers,
insurance companies, and various
industry associations, DTC amended its
filing four times in order to address
concerns with the various proposals.
The provisions contained in DTC’s
proposed rule change, as amended by
the four amendments, are the provisions
discussed in this order.
(1) 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 in 1975 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 that could
enhance the safekeeping of securities
held by the transfer agents on behalf of
DTC, and (iii) require the use of
standardized audit reports addressing
transfer agents’ processes and controls.
In light of the FAST program’s
growth, DTC re-examined the transfer
agent eligibility 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
these FAST eligibility requirements that
need revising or additional components.
The revisions and additional
requirements include: (i) Insurance
requirements that take into account the
level of 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
10 For a description of DTC’s rules relating to
DRS, see Securities Exchange Act Release Nos.
37931 (November 7, 1996) [File No. SR–DTC–96–
15]; 41862 (September 10, 1999) [File No. SR–DTC–
99–16]; 42366 (January 28, 2000) [File No. SR–
DTC–00–01]; 42704 (April 19, 2000) [File No. SR–
DTC–00–04]; 43586 (November 17, 2000) [File No.
SR–DTC–00–09]; 44969 (August 14, 2001) [File No.
SR–DTC–2001–07]; 45232 (January 3, 2002) [SR–
DTC–2001–18]; 45430 (February 11, 2002) [File No.
SR–DTC–2002–01]; 48885 (December 5, 2003) [File
No. SR–DTC–2002–17]; and 52422 (September 14,
2005) [File No. SR–DTC–2005–11].
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standardized audit reports addressing
transfer agents’ processes and controls.
DTC is therefore amending and
restating the minimum requirements for
transfer agents’ participation in the
FAST program in order to improve the
safekeeping of securities that transfer
agents hold for DTC and to provide
improved safekeeping requirements as
more transfer agents participate in the
immobilization and dematerialization of
securities. DTC’s revised minimum
requirements are as follows.
1. The transfer agent must be
registered with the Commission or its
appropriate regulatory authority, except
where the transfer agent’s participation
in the FAST program is limited to acting
solely for municipal issues or unlisted
corporate debt issues (transfer agents
must provide DTC with evidence of
such limited use), and must follow all
applicable rules under the Exchange Act
and 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’’ 11 with DTC.12
3. The transfer agent must sign and
fulfill requirements of the ‘‘Operational
Criteria for the FAST Transfer Agent
Processing’’ 13 and must comply with all
applicable provisions of DTC’s
‘‘Operational Arrangements’’ (‘‘OA’’),14
as amended from time to time.15
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 the risk
of loss, the transfer agent must carry and
11 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.
12 DTC notes that these minimum requirements
incorporate by reference the Balance Certificate
Agreement between the transfer agent and DTC.
13 The ‘‘Operational Criteria for the FAST
Transfer Agent Processing’’ is attached as Exhibit
2(b) to DTC’s initial filing.
14 For more information relating to DTC’s OA,
refer to Securities Exchange Act Release Nos. 45994
(May 29, 2002), 67 FR 39452 [File No. SR–DTC–
2002–02]; 24818 (August 19, 1987), 52 FR 31833
[File No. DTC–87–10]; 25948 (July 27, 1988), 53 FR
29294 [File No. DTC–88–13]; 30625 (April 23,
1992), 57 FR 18534 [File No. DTC–92–06]; 35649
(April 26, 1995), 60 FR 21576 [File No. DTC–94–
19]; and 39894 (April 21, 1998), 63 FR 23310 [File
No. DTC–97–23].
15 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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provide evidence to DTC 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 to DTC of a
minimum of $1 million in Errors and
Omissions insurance.
In the event that a transfer agent can
demonstrate to DTC that its existing
coverage and/or capitalization would
provide similar protections to DTC as
the requirements set forth above, 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 the 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.
A copy of such notice shall also be
delivered 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 that enable
FAST positions to be balanced on a
daily schedule.
9. The transfer agent must provide to
DTC on an annual basis 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. If a transfer agent obtains
a SAS–70 audit report, the transfer agent
shall provide DTC with a copy of the
report within ten (10) business days of
the transfer agent’s receipt of the report.
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10. FAST agents must safeguard all
the securities assets as required by
Exchange Act Rule 17Ad–12 and with at
a minimum the following additional
DTC requirements:
a. Maintenance of a theft and fire
central monitoring alarm system
protecting the entire premises and
b. Maintenance of all certificates in a
vault, safe, or other secure location,
which is accessible only by authorized
personnel.
11. Personnel with access to the vault,
safe, or other secure location 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
compliance or deficiency
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
deficiencies.16
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 securities 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
16 DTC agrees to establish and maintain any and
all such safeguards as are necessary and appropriate
to protect the confidentiality of any notices,
correspondences, or reports from the Commission
to the transfer agent, and any follow-up
correspondences, that the transfer agent provides to
DTC. DTC also agrees that any information obtained
from these notices, correspondences, or reports will
not be used for any reason other than the intended
purposes as authorized by this order and will not
be shared with any person or entity outside of DTC.
DTC will also notify the Commission if these
documents are required to be remitted by DTC to
any other federal or state authority.
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shall have the right, using its sole
discretion, to terminate or to continue
the transfer agent’s status as a FAST
agent.
15. An agent acting on behalf of a
transfer agent shall have the same rights
and responsibilities under these
requirements as if it were the transfer
agent.
(2) Amended and Restated Eligibility
Requirements for DRS Limited
Participants
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DTC is revising the eligibility
requirements for DRS Limited
Participants 17 and the 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.
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;
2. Execute a DTC Limited Participant
Account agreement;
3. Deliver transaction advices directly
to investors relating to DRS Withdrawalby-Transfer requests and provide DTC
with a file containing the information
required by DTC (which must include,
among other things, the transaction
delivery date) in a format and using the
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; 18
6. Implement program changes related
to DTC internal systems modifications
within a reasonable time upon receiving
notification from DTC of such
modifications; and
7. Implement program changes to
support and expand DRS processing
capabilities as agreed to by the DRS Ad
Hoc Committee.
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
17 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. 37931
(November 7, 1996) [File No. SR–DTC–96–15].
18 In DRS, instructions to transfer shares are sent
by a broker-dealer that is a DTC participant or 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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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 and
2. Be included in the FAST
program.19
(4) DTC’s Proposed Standard of Care
Obligations With Respect to FAST
DTC is also clarifying the
responsibilities and liabilities of FAST
agents with respect to their participation
in the FAST program. DTC believes that
historically the Commission has left to
user-governed clearing agencies the
question of how to allocate losses
associated with, among other things,
clearing agency functions.20 In
conjunction with its approval of DTC’s
rule filing whereby DTC adopted a
uniform standard of responsibility with
respect to certain of its services, 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,’’ in light of the
fact that registered clearing agencies had
demonstrated a high level of
responsibility in safeguarding securities
and funds, the Commission did not find
that a standard of care based on a strict
standard of liability was required either
with respect to failures of the clearing
agency or a sub-custodian.21
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, DTC is
adding a clarifying provision to DTC’s
19 An issue may not become a DRS issue if an
‘‘out of balance’’ position exists. An ‘‘out of
balance’’ position occurs when DTC’s records
indicating Cede & Co.’s ownership position do not
match the transfer agent’s records indicating Cede
& Co.’s ownership position.
20 Securities Exchange Act Release Nos. 20221
(September 23, 1983) and 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. 44719 (August 17, 2001)
[File No. SR–DTC–2001–01].
21 Securities Exchange Act Release No. 22940
(February 24, 1986), 51 FR 7169 (order approving
a rule change to establish a comprehensive standard
of care and limitation of liability to its members).
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Fmt 4703
Sfmt 4703
33499
Rule 6, a rule pertaining to DTC’s
standard of care as it applies to DTC
participants, to make clear that DTC will
not be liable to participants for the acts
or omissions of FAST Agents or other
third parties (including, but not limited
to, any depository, custodian, subcustodian, clearing or settlement
system, transfer agent, registrar, data
communication service or delivery
service) unless a loss is caused directly
by DTC’s gross negligence, willful
misconduct, or violation of federal
securities laws for which there is a
private right of action. In addition, DTC
is making it clear that under no
circumstance shall DTC be liable for the
selection or acceptance of any third
party as an agent of DTC, including a
transfer agent participating in the FAST
Program.
III. Comment Letters 22
The Commission received a total of 47
comment letters on DTC’s initial
proposal and the subsequent four
amendments (published in three notices
for comment).23 Specifically, the
22 This order only addresses specific comments
that relate to provisions in DTC’s proposed rule
change as the proposed rule change is being
approved. It does not address comments on
provisions that were either modified or deleted in
response to comments.
23 Letters from Loren K. Hanson, Assistant
Secretary, Otter Tail Corporation (June 5, 2007);
Steven D. Lucas, Director of Transfer Agent
Compliance, Investors Bank & Trust Company (June
15, 2007); Walter E. Grote, Senior Vice President,
Travelers Bond & Financial Products (June 19,
2007); The Surety & Fidelity Association of America
(June 19, 2007); Thomas L. Montrone, President and
Chief Executive Officer, Registrar and Transfer
Company (June 19, 2007); Salli Marinov, President
and Chief Executive Officer, First American Stock
Transfer Company (June 20, 2007); Steve Nelson,
President and Chairman of the Board, Continental
Stock Transfer & Trust Company (June 20, 2007);
Dennis Callahan, Chairman, Bank Depository User
Group (June 21, 2007); Kevin Kopaunik, Fidelity
Transfer Company (June 21, 2007); Jonathan Miller,
President StockTrans, Inc. (June 21, 2008); Artie
Retolatto, 1st Global Stock Transfer, LLC (June 21,
2007); James R. Alden, President, Shareholder
Services Association (June 22, 2007); James Becker,
Zions First National Bank (June 22, 2007); J. Donald
Boggus, Jr., President and Chief Executive Officer,
Crescent Banking Company and Crescent Bank and
Trust Company (June 22, 2007); Albert Howell,
Chairman, Regulatory and Clearance Committee,
SIFMA Securities Operations Division, (June 22,
2007); Lennie M. Kaufman, Executive Vice
President, Wells Fargo Shareowner Services (June
22, 2007); Lawrence Morillo, Chairman, Legal and
Regulatory Subcommittee, SIFMA Operations
Committee (June 22, 2007); J. Robert Morris,
Managing Director, Valiant Trust Company (June
22, 2007); Cristeena G. Naser, Senior Counsel,
Center for Securities, Trust & Investments,
American Bankers Association (June 22, 2007);
James R. Nielsen, Senior Vice President, U.S. Bank
National Association (June 22, 2007); Charles V.
Rossi, President, The Securities Transfer
Association, Inc. (June 22, 2007); Steven
Rothbloom, President and Chief Executive Officer,
Computershare North America (June 22, 2007);
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Commission received twenty-seven
comment letters on DTC’s original
proposed rule change, as amended by
Amendments 1 and 2.24 Twenty-three of
William Speirs, President, Securities Transfer
Association of Canada (June 26, 2007); Susanne
Trimbath, PhD, Chief Executive Officer and Chief
Economist, STP Advisory Services, LLC (June 26,
2007); Thomas M. Sullivan, Chief Counsel for
Advocacy, and Charles A. Maresca, Director,
Interagency Affairs, U.S. Small Business
Administration (June 27, 2007); Gary N. Nazare,
Managing Director, Transfer Agency Services, The
Bank of New York (June 29, 2007), Charles Douglas
Bethill, Thacher, Proffitt & Wood LLP (December
28, 2007), Charles V. Rossi, President, Securities
Transfer Association, Inc. (March 17, 2008);
William Speirs, President, Securities Transfer
Association of Canada (March 18, 2008); Steven G.
Nelson, Chairman of the Board and President,
Continental Stock Transfer & Trust Company
(March 19, 2008); Martin J. McHale Jr., President,
US Equity Services, Computershare (March 20,
2008); Loren Hanson, Assistant Secretary, Otter Tail
Corporation (March 20, 2008); Kevin B. Halter, Jr.,
President, Securities Transfer Corporation (March
20, 2008); Mary C. Fernandez, Standard Registrar
and Transfer Agency, Inc. (March 20, 2008); and
Cristeena G. Naser, Senior Counsel, Center for
Securities, Trust & Investments, American Bankers
Association (March 20, 2008).
24 Letters from Loren K. Hanson, Assistant
Secretary, Otter Tail Corporation (June 5, 2007);
Steven D. Lucas, Director of Transfer Agent
Compliance, Investors Bank & Trust Company (June
15, 2007); Walter E. Grote, Senior Vice President,
Travelers Bond & Financial Products (June 19,
2007); The Surety & Fidelity Association of America
(June 19, 2007); Thomas L. Montrone, President and
Chief Executive Officer, Registrar and Transfer
Company (June 19, 2007); Salli Marinov, President
and Chief Executive Officer, First American Stock
Transfer Company (June 20, 2007); Steve Nelson,
President and Chairman of the Board, Continental
Stock Transfer & Trust Company (June 20, 2007);
Dennis Callahan, Chairman, Bank Depository User
Group (June 21, 2007); Kevin Kopaunik, Fidelity
Transfer Company (June 21, 2007); Jonathan Miller,
President StockTrans, Inc. (June 21, 2008); Artie
Retolatto, 1st Global Stock Transfer, LLC (June 21,
2007); James R. Alden, President, Shareholder
Services Association (June 22, 2007); James Becker,
Zions First National Bank (June 22, 2007); J. Donald
Boggus, Jr., President and Chief Executive Officer,
Crescent Banking Company and Crescent Bank and
Trust Company (June 22, 2007); Albert Howell,
Chairman, Regulatory and Clearance Committee,
SIFMA Securities Operations Division, (June 22,
2007); Lennie M. Kaufman, Executive Vice
President, Wells Fargo Shareowner Services (June
22, 2007); Lawrence Morillo, Chairman, Legal and
Regulatory Subcommittee, SIFMA Operations
Committee (June 22, 2007); J. Robert Morris,
Managing Director, Valiant Trust Company (June
22, 2007); Cristeena G. Naser, Senior Counsel,
Center for Securities, Trust & Investments,
American Bankers Association (June 22, 2007);
James R. Nielsen, Senior Vice President, U.S. Bank
National Association (June 22, 2007); Charles V.
Rossi, President, The Securities Transfer
Association, Inc. (June 22, 2007); Steven
Rothbloom, President and Chief Executive Officer,
Computershare North America (June 22, 2007);
William Speirs, President, Securities Transfer
Association of Canada (June 26, 2007); Susanne
Trimbath, PhD, Chief Executive Officer and Chief
Economist, STP Advisory Services, LLC (June 26,
2007); Thomas M. Sullivan, Chief Counsel for
Advocacy, and Charles A. Maresca, Director,
Interagency Affairs, U.S. Small Business
Administration (June 27, 2007); Gary N. Nazare,
Managing Director, Transfer Agency Services, The
Bank of New York (June 29, 2007); and Charles
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18:36 Jul 10, 2009
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the commenters opposed some or all of
the provisions in the proposed rule
change while three commenters
supported the proposed rule change.
DTC also submitted a comment letter
addressing the concerns and issues
raised by the opposing commenters.
In response to commenters’ concerns
raised by the first two amendments to
DTC’s proposed rule change, DTC
amended its filing for a third time. The
Commission received ten comment
letters to the third amendment, with
eight commenters continuing to oppose
the filing 25 and one commenter
requesting clarification as to the
application of one of the requirements
of the proposed rule change to issuer
transfer agents.26 In response to the
concerns raised by these nine
commenters, DTC submitted a comment
letter.27 The comments set forth by
those opposing the proposed rule
change were for the most part the same
concerns as were expressed in the
comment letters submitted in response
to the first notice of the first proposed
rule change as amended by
Amendments 1 and 2.
After approximately one and a half
years of negotiations between DTC and
the transfer agent community, DTC
amended the proposed rule change for
a fourth and final time. The Commission
received ten comment letters in
response to the proposed rule change as
modified by Amendment 4, with nine
commenters opposing some or all of the
proposed rule and DTC again submitting
a comment letter addressing the
commenter concerns.28 Seven of the
Douglas Bethill, Thacher, Proffitt & Wood LLP
(December 28, 2007).
25 Letters from Charles V. Rossi, President,
Securities Transfer Association, Inc. (March 17,
2008); William Speirs, President, Securities
Transfer Association of Canada (March 18, 2008);
Steven G. Nelson, Chairman of the Board and
President, Continental Stock Transfer & Trust
Company (March 19, 2008); Martin J. McHale Jr.,
President, US Equity Services, Computershare
(March 20, 2008); Loren Hanson, Assistant
Secretary, Otter Tail Corporation (March 20, 2008);
Kevin B. Halter, Jr., President, Securities Transfer
Corporation (March 20, 2008); Mary C. Fernandez,
Standard Registrar and Transfer Agency, Inc.
(March 20, 2008); and Cristeena G. Naser, Senior
Counsel, Center for Securities, Trust & Investments,
American Bankers Association (March 20, 2008).
26 Letter from Ray Dunn, Director of Shareholder
Services, The Southern Company (March 20, 2008).
27 Letter from Charles Douglas Bethill, Thacher
Proffitt & Wood, LLP (on behalf of DTC) (April 10,
2008).
28 Letters from Martin J. McHale, President, U.S.
Equity Services, Computershare (July 2, 2008);
Loren Hanson, Assistant Secretary, Otter Tail
Corporation (July 7, 2008); Charles V. Rossi,
President, The Securities Transfer Association, Inc.
(July 9, 2008); Kevin Kopaunik, Fidelity Transfer
Company (July 10, 2008); Dorothy Miller, Vice
President & Trust Officer, Hancock Bank (July 10,
2008); Stephen G. Nelson, President and Chairman
of the Board, Continental Stock Transfer & Trust
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Fmt 4703
Sfmt 4703
nine commenters opposing the
proposed rule change expressed their
concerns in response to one or both of
the prior published notices. None of the
commenters opposing the proposed rule
change, as amended by the fourth
amendment, raised any issues that had
not been raised in their prior comment
letters.
The majority of the nine commenters
that opposed DTC’s proposed rule
change, which were issuers, transfer
agents, or industry associations
representing issuers or transfer agents,
an insurance company, an association
representing insurance companies, the
American Banking Association
(‘‘ABA’’), the Office of Advocacy of the
Small Business Administration
(‘‘SBA’’), and one individual, opposed
the proposed rule change for various
reasons. Most of the commenters raised
a number of general policy concerns
such as: (1) DTC lacks the authority to
impose rules on transfer agents, and the
imposition of such rules is
inappropriate given the commercial
relationship between transfer agents and
DTC; (2) the specific requirements are
unduly burdensome, unnecessary,
costly (particularly with respect to small
transfer agents), and without sufficient
justification; (3) the proposed rule
change appears based on the premise
that transfer agents act as custodian for
DTC’s securities as recorded on the
records of the issuer—a premise that the
transfer agents and banks reject as
erroneous; and (4) many of the
provisions proposed by DTC are
inconsistent with the movement to a
book-entry form of securities ownership.
The remaining commenters, which
were predominantly industry
associations representing broker-dealers,
supported the proposed rule change
because of their belief that DTC’s
proposed requirements are necessary to
facilitate the continuing increase in the
use of DRS, which they contend is
necessary in order to achieve the
industry’s objective of decreasing or
eliminating the use of securities
certificates in the U.S. market, and to
reduce the risks associated with the
continuing increase in volume and
value of DRS transactions.
The following describes commenters’
concerns with the specific provisions
remaining in DTC’s proposed rule
Company (July 10, 2008); William Speirs, President,
Securities Transfer Association of Canada (July 11,
2008); Barbara J. Trivedi, Shareholder Services
Manager, Crescent Banking Company, Crescent
Bank and Trust Company (July 10, 2008); Edward
L. Pittman, Thelen Reid Brown Raysman & Steiner
LLP (July 15, 2008); John Petrofsky, Associate
Counsel, DTC (July 30, 2008).
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change in its final form after all
amendments.
Jurisdiction. Many of the commenters
who are transfer agents or organizations
representing transfer agents oppose the
proposed rule change because they
contend that the Commission and
banking regulators are statutorily
charged with the responsibility of
regulating transfer agents, and DTC is
not. They further argue that even though
the transfer agents are ‘‘limited
participants’’ of DTC with respect to
their participation in DRS, transfer
agents do not have the full procedural
safeguards that statutorily exist for DTC
participants pursuant to Section 17A of
the Exchange Act.29 The transfer agents
are also concerned that the rule change
gives DTC ‘‘unfettered’’ discretion to
decide which transfer agents are eligible
to participate in DRS, to impose
significant requirements to change
transfer agent systems and operations,
and to terminate transfer agents as FAST
agents and limited participants at DTC’s
discretion.
Insurance Requirements. Almost all of
those opposed to DTC’s rule filing
objected to some or all of DTC’s
proposed insurance requirements as
being too costly and too onerous,
particularly the ‘‘excessively’’ high
minimum coverage levels, ‘‘excessively’’
low deductibles, and opposed the
requirement of notifying DTC of changes
in their insurance policies. The STA
and several other commenters stated
that they believe DTC and other
registered holders have sustained
virtually no economic losses as a result
of under-insured transfer agent activity,
thereby making the proposed insurance
requirements unnecessary, overly broad,
and without justification.
Many of the commenters that oppose
the rule change contend that for some
smaller transfer agents, the amounts of
proposed minimum insurance coverage
would exceed the value of DTC’s
securities held by the transfer agent and
therefore are not reasonable. One
commenter representing a large number
of commercial bank and non-bank
transfer agents noted that it believes that
none of its members currently meet the
insurance and deductible
requirements.30 In addition, this
commenter along with the ABA and
several other transfer agents opposed
the requirement for transfer agents to (1)
notify DTC at least 30 days prior to any
expiration or change in insurance limits
as unrealistic due to the manner in
which policies are renewed, and (2)
29 15
U.S.C 78q–1(a)(3).
from the Securities Transfer Association
(‘‘STA’’).
30 Letter
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18:36 Jul 10, 2009
Jkt 217001
notify DTC within five days of any
notice of threatened or actual lapse in
coverage as an unreasonable burden on
insurance carriers.
Safekeeping Requirements. Most
transfer agents that opposed the
amended proposed rule change took
issue with DTC dictating specific
physical security standards with respect
to transfer agents’ safeguarding
obligations. Many of these commenters
suggested that the Commission’s
safekeeping rule, Rule 17Ad–12, is
sufficient to govern transfer agent
safeguarding obligations.
DTC maintains that specific physical
security standards are justified in light
of transfer agents holding blank
securities certificates, which can and
have been fraudulently issued or
endorsed.
Audit Requirements. Almost all the
commenters opposing the proposed rule
change objected to some or all of DTC’s
proposed audit requirements. Most of
the transfer agents and industry
associations representing issuers and
agents argued that requiring submission
to DTC of a SAS 70 or SSAE–19 report
certifying compliance with DTC
requirements and Commission rules and
requiring attesting to the soundness of
the transfer agent’s controls is
superfluous, unwarranted, and costly,
especially in light of the requirement
that an audit report be filed with the
Commission by registered transfer
agents pursuant to Exchange Act Rule
17Ad–13. The transfer agents contended
that the existing Commission
regulations should be sufficient to
satisfy DTC’s concerns.
One issuer acting as its own transfer
agent stated its belief that DTC rules
have been developed to address large
commercial transfer agent operations
without taking into consideration other
types of transfer agents. This commenter
noted that pursuant to an exemption
provided to small transfer agents under
Commission Rule 17Ad–4, it is
exempted from the Commission’s audit
requirements. This commenter stated
that small transfer agents pose
significantly less risk to the public than
large commercial transfer agents,
thereby providing the basis for the
Commission’s exemption. This
comment also argued that as a publicly
traded company, it has audit
requirements, including internal
controls that are audited internally and
externally pursuant to federal
regulation. Compliance with DTC’s
rules, this transfer agent estimated,
would cost in excess of $10,000 per year
for the audit when it conducts less than
1,000 transfers per year.
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33501
Shareholder Statements. Many
transfer agents objected to DTC
requiring that for DRS withdrawal-bytransfers, DRS Limited Participants send
a transaction advice to shareholders by
mail and to DTC by electronic file.
While the concept of sending such
statements was not objectionable to
most of the transfer agents opposing this
requirement, the STA maintains that
DTC has no authority to mandate
notifications to shareholders holding
positions in DRS.
Notice of Regulatory Action and Onsite Inspection by DTC. The STA and a
number of transfer agents opposed the
requirement to provide DTC with copies
of Commission examination reports
within five business days of ‘‘any
alleged material deficiencies.’’ The
transfer agents contend they do not
provide this information to any other
registered securityholder, DTC has
failed to demonstrate a need for such
information, and DTC is not entitled to
this confidential information under
applicable law or regulation. They also
objected to the requirement that transfer
agents allow DTC access to their
premises for on-site inspections.
System Modifications and Enhanced
DRS Processing Capabilities. The STA
and a number of transfer agents objected
to DTC requiring transfer agents to
implement program changes and system
modifications to support and expand
DRS processing capabilities. The
transfer agents contend that such a
requirement fails to address the
reasonableness and necessity of any
changes and fails to address the costs
that may be incurred by transfer agents.
Transfer agents objected to DTC
unilaterally determining what changes
to make to FAST and DRS without
agreement from the transfer agents.
They also objected to the use of the DRS
Ad Hoc Committee as the ultimate
arbiter of disputes because they believe
the Committee is dominated by DTC
and its participants and because the
Committee has no governing by-laws or
rules.
Compensation. The STA objected as
commercially unreasonable that transfer
agents provide DRS and FAST services
to DTC without compensation. It argued
that transfer agents should be entitled to
refuse to provide DTC services if DTC
refuses to pay for services rendered
without the threat that DTC could throw
them out of FAST and DRS.
Standard of Care. Transfer agents
opposed DTC’s standard of care
provision because they believe that it
would permit DTC to avoid
responsibility for its own errors and
would force transfer agents to be
responsible if a third party (i.e., broker-
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dealer or registered shareholder) were to
suffer a loss caused by an error at DTC
with regard to transactions or transfers
involving transfer agents. They contend
that the exculpatory language would
force injured parties to seek recovery
from the transfer agent even in the event
the transfer agent were not at fault
instead of each party bearing
responsibility for its own processing
errors. The transfer agents state that a
unilateral waiver would not be in
accordance with standard industry
practice or public policy.
Regulatory Flexibility Act of 1980.
The transfer agents contend that no
evidence of any assessment has been
done by DTC to examine the economic
impact on small transfer agents or small
issuers to ensure compliance with the
requirements of the Regulatory
Flexibility Act of 1980.31
IV. Discussion
Section 17A(b)(3)(F) of the Act
requires that the rules of a clearing
agency be designed to promote the
prompt and accurate clearance and
settlement of securities transactions, to
assure the safeguarding of securities and
funds which are in the custody or
control of the clearing agency or for
which it is responsible, to foster
cooperation and coordination with
persons engaged in the clearance and
settlement of securities transactions,
and to remove impediments to and
perfect the mechanism of a national
system for the prompt and accurate
clearance and settlement of securities
transactions, and in general, to protect
investors and the public interest.32 For
the reasons described below, the
Commission finds that the rule change
as amended is consistent with these
provisions of Section 17A.
In Section 17A of the Act, Congress
set forth its finding that the prompt and
accurate clearance and settlement of
securities transactions, including the
transfer of record ownership and
safeguarding of securities and funds
related to clearance and settlement
activities, is necessary for the protection
of investors and those acting on behalf
of investors.33 Inefficient clearance and
settlement procedures, Congress found,
impose unnecessary costs on investors
and those acting on their behalf.34 The
Commission’s approval of DTC’s
registration as a clearing agency
constituted an important step in its
31 The Commission notes that the Regulatory
Flexibility Act of 1980 is not applicable to proposed
rule changes filed by self-regulatory organizations
pursuant to Section 19(b) of the Exchange Act.
32 15 U.S.C. 78q–1(b)(3)(F).
33 15 U.S.C. 78q–1(a)(1)(A).
34 15 U.S.C. 78q–1(a)(1)(B).
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18:36 Jul 10, 2009
Jkt 217001
efforts to facilitate the development of a
national clearance and settlement
system and a significant step in
achieving the goals established by
Congress.35
Consistent with this directive, the
Commission has encouraged the
immobilization and the
dematerialization of securities holdings
by supporting the use of alternatives to
holding securities in certificated form in
an effort to improve efficiencies and
decrease risks associated with
processing securities certificates.36
Among other things, the Commission
has approved the rule filings of selfregulatory 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 37 and
require that before any security can be
listed for trading, it must have been
made depository eligible if possible.38
The Commission has also approved a
number of rule filings relating to DTC’s
FAST program, which has facilitated
significantly more efficient processing
of transfers by eliminating the physical
delivery of securities certificates
between transfer agents and DTC.39
More recently the Commission has
approved the implementation and
expansion of DRS by approving DTC’s
rules relating to the administration of
35 Exchange Act Release No. 20221 (September
23, 1983), 48 FR 45167 (October 3, 1983).
36 The use of certificates often results in
significant delays and expenses in processing
securities transactions and raises safety concerns
associated with lost, stolen, and counterfeit
certificates. The concerns associated with lost
certificates were dramatically demonstrated during
the September 11, 2001, tragedy when tens of
thousand of certificates maintained in brokerdealers’ vaults either were destroyed or were
unavailable for transfer. See 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).
37 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).
38 Securities Exchange Act Release No. 35798
(June 1, 1995), 60 FR 30909 (June 12, 1995) (order
approving rules setting forth depository eligibility
requirements for issuers seeking to have their shares
listed on the exchange).
39 Securities Exchange Act Release Nos. 13342
(March 8, 1977) [File No. SR–DTC–76–3]; 14997
(July 26, 1978) [File No. SR–DTC–78–11]; 21401
(October 16, 1984) [File No. SR–DTC–84–8]; 31941
(March 3, 1993) [SR–DTC–92–15]; and 46956
(December 6, 2002) [File No. SR–DTC–2002–15].
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DRS facilities used by transfer agents
and broker-dealers.40
DTC’s FAST program authorizes
transfer agents to hold securities on
behalf of DTC in order to avoid having
multiple physical certificates sent
between transfer agents and DTC
because of DTC’s ever-changing
ownership positions. Eliminating the
need to transfer a physical certificate
every time DTC’s ownership position
changes reduces risk and costs of
processing transfers, which is a benefit
to not only DTC, transfer agents, and
issuers but also to the millions of
beneficial owners of the securities
holding in street name at DTC.
Because of the critical role the FAST
and DRS programs play in the clearance
and settlement of transactions in
securities, which are legally owned by
DTC and beneficially owned by DTC
participants and their customers, the
Commission believes that DTC has a
legitimate interest in making sure that
FAST agents and DRS Limited
Participants comply with reasonable
and appropriate requirements for
participation in these programs in order
that DTC can fulfill its statutory
obligation to safeguard securities and
funds that are in its custody or control
or for which it is responsible. In
response to the comments submitted in
response to the proposed rule changes,
DTC amended its proposal four times in
an effort to reduce the cost and
operational burden on transfer agents
while still maintaining the appropriate
level of safeguards necessary for DTC to
comply with its statutory obligations.
The Commission believes that the
requirements, as amended, are fair and
reasonable in light of the vital function
the FAST and DRS programs play in the
national clearance and settlement
system and should help further
improvements in the interactions
between transfer agents and DTC, which
is an essential component of improving
the industry’s dematerialization efforts.
In adopting these new rules, the
Commission does not believe that DTC
is attempting to ‘‘regulate’’ transfer
agents as some commenters contended.
Rather, the Commission believes that
DTC is imposing reasonable obligations
necessary for it to comply with its
statutory obligations and only on those
transfer agents that choose to participate
in its FAST and DRS programs. Further,
as a self-regulatory organization, DTC is
required to file rule changes affecting
the FAST or DRS program, and by
extension, those transfer agents
participating in these programs, with
the Commission pursuant to Section
40 See
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Federal Register / Vol. 74, No. 132 / Monday, July 13, 2009 / Notices
19(b) of the Exchange Act. Most of these
filings have been and will continue to
be filed with the Commission,
published for public comment, and
subject to the review and approval by
the Commission. This process should
provide transfer agents, as well as others
affected by DTC’s rules, adequate
procedural safeguards.
Some commenters contend that by
allowing DTC the authority to determine
which transfer agents may become a
FAST transfer agent or DRS Limited
Participant, DTC is also granted by
extension the authority to determine
which transfer agents may continue to
operate a transfer agent business. The
Commission does not agree. Many
transfer agents act as transfer agent for
publicly traded securities and are not
FAST agents or DRS Limited
Participants. But if a transfer agent
chooses to act as transfer agent for an
issuer of securities that requires it to
become a FAST agent or DRS Limited
Participant, then DTC has an interest
and statutory responsibility to ensure
that the securities held on its behalf at
the transfer agent are safeguarded and
that the settlement of transactions in
those securities, which includes safe
and efficient transfers in ownership,
occurs in a prompt and accurate
manner.
With regards to specific operational
requirements required by DTC’s rule,
such as insurance requirements,
physical security standards, audit
requirements, and system modifications
to support or enhance DRS
functionality, the Commission believes
that the amended rule contains
standards that are appropriate and
reasonably designed to achieve DTC’s
goal of protecting the securities held by
transfer agents on DTC’s behalf and on
behalf of DTC’s participants and the
participants’ customers. The
Commission does not find it compelling
to contend that just because DTC and
other registered holders have not
sustained economic losses, DTC’s
insurance requirements are overly broad
or unjustified. The point of the rule’s
insurance requirement is to protect
against losses before losses occur.
Furthermore, if a transfer agent can
demonstrate that its existing coverage or
capitalization provide similar
protections as the insurance required
DTC, DTC has the discretion to grant a
waiver from any or all of the
requirement. This flexibility should
provide DTC the ability to properly
address situations where the required
coverage is too onerous or ineffective for
the type, amount, or dollar value of
DTC’s securities held by the transfer
agent.
VerDate Nov<24>2008
18:36 Jul 10, 2009
Jkt 217001
The Commission also finds little merit
in the contention that the audit reports
required by the rule are unwarranted or
unnecessarily costly. The Commission
believes that requiring transfer agents to
provide to DTC the Annual Study of
Evaluation of Internal Accounting
Controls, conducted pursuant to Rule
17Ad–13, and a SAS–70 audit report, if
the agent has already obtained such a
report for other purposes, are reasonable
in light of DTC’s statutory obligations to
ensure the safeguarding of its securities.
These audit reports provide DTC with
additional information about the
adequacy of the transfer agent’s
operational capabilities and internal
controls for the transfer of record
ownership and the safeguarding of
related securities and funds. This is not
only relevant but material information
to DTC. In addition, because DTC’s rule
requires that transfer agents provide
DTC with documents that have already
been produced by the transfer agent for
other purposes and should be in the
transfer agent’s possession, the
Commission believes that there should
be little or no additional expense and
relatively little extra burden on transfer
agents in providing these documents to
DTC.
Similarly, commenters’ concerns
about requiring transfer agents to
provide DTC with a copy of the two
most recent compliance or deficiency
correspondences from the Commission
and all notices of alleged material
deficiencies documented by the
Commission appear to be misplaced.
While the Commission appreciates the
sensitive nature of transfer agent
examination reports and the need to
ensure the confidentiality of all
information contained in those reports,
the Commission believes nonetheless
that DTC’s request for these documents
is reasonable. Information contained in
those reports should allow DTC to better
manage any potential risks associated
with the transfer agent’s ability to
transfer securities, maintain ownership
records, or operate its business in a safe
manner.
Even though some commenters
objected to DTC’s provision requiring
transfer agents to send DTC a file
indicating a transaction advice has been
sent to investors for each DRS
withdrawal-by-transfers, the
Commission believes DTC has a valid
interest in requiring notice that
investors have obtained a transaction
advice from transfer agents. The file
required to be sent to DTC will provide
confirmation that the transaction advice
has been sent to the investor so that
DTC can close out its pending transfer
position or file (sometimes referred to as
PO 00000
Frm 00099
Fmt 4703
Sfmt 4703
33503
an open transfer record). If that position
is not closed, then DTC’s records will
show that the transfer remains open and
it will become an outstanding aged
transfer. To avoid this, DTC is requiring
transfer agents to send a notice that the
transfer has been completed by sending
the investor a transaction advice. This
process is similar to that of the current
process when a transfer agent notifies
DTC that a certificate has been mailed
to the investor.
Finally, the Commission believes that
commenters’ concerns regarding the
rule’s clarification of DTC’s standard of
care provision are unfounded. The
purpose of the rule change is to clarify
that DTC shall not be liable to
participants for acts or omissions of any
third party (including without
limitation any depository, custodian,
sub-custodian, clearing or settlement
system, transfer agent, registrar, data
communication service or delivery
service). DTC’s Rule 6 applies to DTC’s
relationship with its participants, not
FAST agents. Therefore, this particular
provision does not have any impact on
FAST Agents that are not also
participants. The provision does not
shift liability from DTC to FAST Agents
or absolve DTC from liability to FAST
Agents.
V. Conclusion
On the basis of the foregoing, the
Commission finds that the proposed
rule change, as amended, 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, as amended, (File No. SR–
DTC–2006–16) be and hereby is
approved.41
For the Commission by the Division of
Trading and Markets, pursuant to delegated
authority.42
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–16455 Filed 7–10–09; 8:45 am]
BILLING CODE 8010–01–P
41 In approving the proposed rule change, the
Commission considered the proposal’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
42 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
E:\FR\FM\13JYN1.SGM
13JYN1
]]>Agencies
[Federal Register Volume 74, Number 132 (Monday, July 13, 2009)]
[Notices]
[Pages 33496-33503]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-16455]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60196; File No. SR-DTC-2006-16]
Self-Regulatory Organizations; The Depository Trust Company;
Order Granting Approval of a Proposed Rule Change as Amended Relating
to FAST and DRS Limited Participant Requirements for Transfer Agents
June 30, 2009.
I. Introduction
On October 12, 2006, The Depository Trust Company (``DTC'') filed
with the Securities and Exchange Commission (``Commission'') proposed
rule change SR-DTC-2006-16 pursuant to Section 19(b)(1) of the
Securities Exchange Act
[[Page 33497]]
of 1934 (``Act'').\1\ On March 29, 2007, and May 3, 2007, DTC filed
amendments to the proposed rule change. On May 25, 2007, the Commission
published notice of the proposed rule change as amended by Amendment 1
and Amendment 2.\2\ On December 31, 2007, DTC again filed an amendment.
Notice of the amended proposal was published in the Federal Register on
February 20, 2007.\3\ On June 23, 2008, DTC again filed an amendment.
Notice of the amended proposed rule change was published in the Federal
Register on June 19, 2008.\4\ The Commission received 47 comment
letters in total to the proposed rule change.\5\ For the reasons
discussed below, the Commission is granting approval of the proposed
rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 55816 (May 25, 2007), 71
FR 30648 (June 1, 2007).
\3\ Securities Exchange Act Release No. 57362 (February 20,
2008), 73 FR 10849 (February 28, 2008).
\4\ Securities Exchange Act Release No. 57959 (June 12, 2008),
73 FR 57959 (June 19, 2008).
\5\ Infra note 22. The comment letters can be found at https://www.sec.gov/comments/sr-dtc-2006-16/dtc200616shtml.
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II. Description
Prior to the establishment of DTC's Fast Automated Securities
Transfer program (``FAST''), transfers of securities to or from DTC on
behalf of its participants occurred by sending securities certificates
back and forth between DTC and transfer agents. In the case of
securities being deposited with DTC, DTC sent the certificates received
by its participants 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 participant, and the transfer agent
returned a reregistered security certificate to DTC for delivery to the
withdrawing participant or delivered the reregistered security
certificate to another entity as directed and sent a security
certificate to DTC representing the remainder of DTC's position. The
process of physically transporting securities certificates between DTC
and transfer agents exposed DTC, its participants, and the transfer
agents to the risk of loss during transit and resulted in significant
expenses.
DTC's FAST program was designed to eliminate some of the risks and
costs related to this production and transportation of securities
certificates. Under the FAST program, transfer agents hold FAST
eligible securities in the name of Cede & Co. for the benefit of
DTC.\6\ As additional securities are deposited or withdrawn from DTC,
transfer agents adjust the size of DTC's position as appropriate and
electronically confirm theses changes with DTC. Transfer agents acting
as ``FAST agents'' are holding in custody for DTC those securities that
would otherwise be held at DTC. 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 for issuers, transfer agents,
broker-dealers, and DTC.
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\6\ For a description of DTC's current rules relating to FAST,
refer to Securities Exchange Act Release Nos. 13342 (March 8, 1977)
[File No. SR-DTC-76-3]; 14997 (July 26, 1978) [File No. SR-DTC-78-
11]; 21401 (October 16, 1984) [File No. SR-DTC-84-8]; 31941 (March
3, 1993) [SR-DTC-92-15]; and 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\ Recently all the major securities exchanges have
made changes to the listing requirements to require companies to make
their securities eligible to participate in the Direct Registration
System (``DRS'').\8\ Because FAST eligibility is a prerequisite to an
issue being eligible for DRS, DTC expects that the number of FAST
eligible securities will continue to expand.\9\ Furthermore, because
being a FAST agent is a criterion for a transfer agent's eligibility
for participation in DRS, DTC anticipates significant growth in the
number of FAST agents.\10\
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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\ DRS provides an investor with the ability to register her
securities in her own name on the issuer's records and to
efficiently transfer by book-entry movements her securities
positions to her broker-dealer rather than holding a physical
certificate or holding indirectly through a financial intermediary
(e.g., a broker-dealer) in ``street name.'' DRS also allows for the
transfer of a DRS position from the books of the issuer to the
account of a DTC broker-dealer participant and vice versa through
the facilities of DTC using FAST.
\9\ 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 13547 (March 22, 2007) [File No. SR-Phlx-2006-69];
55481 (March 15, 2007), 72 FR 13546 (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].
\10\ For a description of DTC's rules relating to DRS, see
Securities Exchange Act Release Nos. 37931 (November 7, 1996) [File
No. SR-DTC-96-15]; 41862 (September 10, 1999) [File No. SR-DTC-99-
16]; 42366 (January 28, 2000) [File No. SR-DTC-00-01]; 42704 (April
19, 2000) [File No. SR-DTC-00-04]; 43586 (November 17, 2000) [File
No. SR-DTC-00-09]; 44969 (August 14, 2001) [File No. SR-DTC-2001-
07]; 45232 (January 3, 2002) [SR-DTC-2001-18]; 45430 (February 11,
2002) [File No. SR-DTC-2002-01]; 48885 (December 5, 2003) [File No.
SR-DTC-2002-17]; and 52422 (September 14, 2005) [File No. SR-DTC-
2005-11].
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As a result of discussions with industry representatives, including
transfer agents, broker-dealers, issuers, insurance companies, and
various industry associations, DTC amended its filing four times in
order to address concerns with the various proposals. The provisions
contained in DTC's proposed rule change, as amended by the four
amendments, are the provisions discussed in this order.
(1) 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 in 1975 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 that could enhance the safekeeping of
securities held by the transfer agents on behalf of DTC, and (iii)
require the use of standardized audit reports addressing transfer
agents' processes and controls.
In light of the FAST program's growth, DTC re-examined the transfer
agent eligibility 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 these FAST eligibility requirements that need revising or
additional components. The revisions and additional requirements
include: (i) Insurance requirements that take into account the level of
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
[[Page 33498]]
standardized audit reports addressing transfer agents' processes and
controls.
DTC is therefore amending and restating the minimum requirements
for transfer agents' participation in the FAST program in order to
improve the safekeeping of securities that transfer agents hold for DTC
and to provide improved safekeeping requirements as more transfer
agents participate in the immobilization and dematerialization of
securities. DTC's revised minimum requirements are as follows.
1. The transfer agent must be registered with the Commission or its
appropriate regulatory authority, except where the transfer agent's
participation in the FAST program is limited to acting solely for
municipal issues or unlisted corporate debt issues (transfer agents
must provide DTC with evidence of such limited use), and must follow
all applicable rules under the Exchange Act and 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'' \11\ with
DTC.\12\
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\11\ 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.
\12\ 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'' \13\
and must comply with all applicable provisions of DTC's ``Operational
Arrangements'' (``OA''),\14\ as amended from time to time.\15\
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\13\ The ``Operational Criteria for the FAST Transfer Agent
Processing'' is attached as Exhibit 2(b) to DTC's initial filing.
\14\ For more information relating to DTC's OA, refer to
Securities Exchange Act Release Nos. 45994 (May 29, 2002), 67 FR
39452 [File No. SR-DTC-2002-02]; 24818 (August 19, 1987), 52 FR
31833 [File No. DTC-87-10]; 25948 (July 27, 1988), 53 FR 29294 [File
No. DTC-88-13]; 30625 (April 23, 1992), 57 FR 18534 [File No. DTC-
92-06]; 35649 (April 26, 1995), 60 FR 21576 [File No. DTC-94-19];
and 39894 (April 21, 1998), 63 FR 23310 [File No. DTC-97-23].
\15\ 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 the risk of loss, the transfer agent
must carry and provide evidence to DTC 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
to DTC of a minimum of $1 million in Errors and Omissions insurance.
In the event that a transfer agent can demonstrate to DTC that its
existing coverage and/or capitalization would provide similar
protections to DTC as the requirements set forth above, 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 the 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.
A copy of such notice shall also be delivered 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 that enable FAST positions to be balanced on a
daily schedule.
9. The transfer agent must provide to DTC on an annual basis 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. If a transfer
agent obtains a SAS-70 audit report, the transfer agent shall provide
DTC with a copy of the report within ten (10) business days of the
transfer agent's receipt of the report.
10. FAST agents must safeguard all the securities assets as
required by Exchange Act Rule 17Ad-12 and with at a minimum the
following additional DTC requirements:
a. Maintenance of a theft and fire central monitoring alarm system
protecting the entire premises and
b. Maintenance of all certificates in a vault, safe, or other
secure location, which is accessible only by authorized personnel.
11. Personnel with access to the vault, safe, or other secure
location 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 compliance or deficiency 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 deficiencies.\16\
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\16\ DTC agrees to establish and maintain any and all such
safeguards as are necessary and appropriate to protect the
confidentiality of any notices, correspondences, or reports from the
Commission to the transfer agent, and any follow-up correspondences,
that the transfer agent provides to DTC. DTC also agrees that any
information obtained from these notices, correspondences, or reports
will not be used for any reason other than the intended purposes as
authorized by this order and will not be shared with any person or
entity outside of DTC. DTC will also notify the Commission if these
documents are required to be remitted by DTC to any other federal or
state authority.
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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
securities 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
[[Page 33499]]
shall have the right, using its sole discretion, to terminate or to
continue the transfer agent's status as a FAST agent.
15. An agent acting on behalf of a transfer agent shall have the
same rights and responsibilities under these requirements as if it were
the transfer agent.
(2) Amended and Restated Eligibility Requirements for DRS Limited
Participants
DTC is revising the eligibility requirements for DRS Limited
Participants \17\ and the 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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\17\ 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. 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;
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 delivery date) in a format and using the
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; \18\
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\18\ In DRS, instructions to transfer shares are sent by a
broker-dealer that is a DTC participant or 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; and
7. Implement program changes to support and expand DRS processing
capabilities as agreed to by the DRS Ad Hoc Committee.
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
and
2. Be included in the FAST program.\19\
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\19\ An issue may not become a DRS issue if an ``out of
balance'' position exists. An ``out of balance'' position occurs
when DTC's records indicating Cede & Co.'s ownership position do not
match the transfer agent's records indicating Cede & Co.'s ownership
position.
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(4) DTC's Proposed Standard of Care Obligations With Respect to FAST
DTC is also clarifying the responsibilities and liabilities of FAST
agents with respect to their participation in the FAST program. DTC
believes that historically the Commission has left to user-governed
clearing agencies the question of how to allocate losses associated
with, among other things, clearing agency functions.\20\ In conjunction
with its approval of DTC's rule filing whereby DTC adopted a uniform
standard of responsibility with respect to certain of its services, 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,'' in light of the fact that registered clearing
agencies had demonstrated a high level of responsibility in
safeguarding securities and funds, the Commission did not find that a
standard of care based on a strict standard of liability was required
either with respect to failures of the clearing agency or a sub-
custodian.\21\
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\20\ Securities Exchange Act Release Nos. 20221 (September 23,
1983) and 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. 44719 (August 17, 2001) [File No. SR-DTC-2001-01].
\21\ Securities Exchange Act Release No. 22940 (February 24,
1986), 51 FR 7169 (order approving a rule change to establish a
comprehensive standard of care and limitation of liability to its
members).
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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, DTC is adding a clarifying provision to DTC's Rule 6, a
rule pertaining to DTC's standard of care as it applies to DTC
participants, to make clear that DTC will not be liable to participants
for the acts or omissions of FAST Agents or other third parties
(including, but not limited to, any depository, custodian, sub-
custodian, clearing or settlement system, transfer agent, registrar,
data communication service or delivery service) unless a loss is caused
directly by DTC's gross negligence, willful misconduct, or violation of
federal securities laws for which there is a private right of action.
In addition, DTC is making it clear that under no circumstance shall
DTC be liable for the selection or acceptance of any third party as an
agent of DTC, including a transfer agent participating in the FAST
Program.
III. Comment Letters \22\
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\22\ This order only addresses specific comments that relate to
provisions in DTC's proposed rule change as the proposed rule change
is being approved. It does not address comments on provisions that
were either modified or deleted in response to comments.
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The Commission received a total of 47 comment letters on DTC's
initial proposal and the subsequent four amendments (published in three
notices for comment).\23\ Specifically, the
[[Page 33500]]
Commission received twenty-seven comment letters on DTC's original
proposed rule change, as amended by Amendments 1 and 2.\24\ Twenty-
three of the commenters opposed some or all of the provisions in the
proposed rule change while three commenters supported the proposed rule
change. DTC also submitted a comment letter addressing the concerns and
issues raised by the opposing commenters.
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\23\ Letters from Loren K. Hanson, Assistant Secretary, Otter
Tail Corporation (June 5, 2007); Steven D. Lucas, Director of
Transfer Agent Compliance, Investors Bank & Trust Company (June 15,
2007); Walter E. Grote, Senior Vice President, Travelers Bond &
Financial Products (June 19, 2007); The Surety & Fidelity
Association of America (June 19, 2007); Thomas L. Montrone,
President and Chief Executive Officer, Registrar and Transfer
Company (June 19, 2007); Salli Marinov, President and Chief
Executive Officer, First American Stock Transfer Company (June 20,
2007); Steve Nelson, President and Chairman of the Board,
Continental Stock Transfer & Trust Company (June 20, 2007); Dennis
Callahan, Chairman, Bank Depository User Group (June 21, 2007);
Kevin Kopaunik, Fidelity Transfer Company (June 21, 2007); Jonathan
Miller, President StockTrans, Inc. (June 21, 2008); Artie Retolatto,
1st Global Stock Transfer, LLC (June 21, 2007); James R. Alden,
President, Shareholder Services Association (June 22, 2007); James
Becker, Zions First National Bank (June 22, 2007); J. Donald Boggus,
Jr., President and Chief Executive Officer, Crescent Banking Company
and Crescent Bank and Trust Company (June 22, 2007); Albert Howell,
Chairman, Regulatory and Clearance Committee, SIFMA Securities
Operations Division, (June 22, 2007); Lennie M. Kaufman, Executive
Vice President, Wells Fargo Shareowner Services (June 22, 2007);
Lawrence Morillo, Chairman, Legal and Regulatory Subcommittee, SIFMA
Operations Committee (June 22, 2007); J. Robert Morris, Managing
Director, Valiant Trust Company (June 22, 2007); Cristeena G. Naser,
Senior Counsel, Center for Securities, Trust & Investments, American
Bankers Association (June 22, 2007); James R. Nielsen, Senior Vice
President, U.S. Bank National Association (June 22, 2007); Charles
V. Rossi, President, The Securities Transfer Association, Inc. (June
22, 2007); Steven Rothbloom, President and Chief Executive Officer,
Computershare North America (June 22, 2007); William Speirs,
President, Securities Transfer Association of Canada (June 26,
2007); Susanne Trimbath, PhD, Chief Executive Officer and Chief
Economist, STP Advisory Services, LLC (June 26, 2007); Thomas M.
Sullivan, Chief Counsel for Advocacy, and Charles A. Maresca,
Director, Interagency Affairs, U.S. Small Business Administration
(June 27, 2007); Gary N. Nazare, Managing Director, Transfer Agency
Services, The Bank of New York (June 29, 2007), Charles Douglas
Bethill, Thacher, Proffitt & Wood LLP (December 28, 2007), Charles
V. Rossi, President, Securities Transfer Association, Inc. (March
17, 2008); William Speirs, President, Securities Transfer
Association of Canada (March 18, 2008); Steven G. Nelson, Chairman
of the Board and President, Continental Stock Transfer & Trust
Company (March 19, 2008); Martin J. McHale Jr., President, US Equity
Services, Computershare (March 20, 2008); Loren Hanson, Assistant
Secretary, Otter Tail Corporation (March 20, 2008); Kevin B. Halter,
Jr., President, Securities Transfer Corporation (March 20, 2008);
Mary C. Fernandez, Standard Registrar and Transfer Agency, Inc.
(March 20, 2008); and Cristeena G. Naser, Senior Counsel, Center for
Securities, Trust & Investments, American Bankers Association (March
20, 2008).
\24\ Letters from Loren K. Hanson, Assistant Secretary, Otter
Tail Corporation (June 5, 2007); Steven D. Lucas, Director of
Transfer Agent Compliance, Investors Bank & Trust Company (June 15,
2007); Walter E. Grote, Senior Vice President, Travelers Bond &
Financial Products (June 19, 2007); The Surety & Fidelity
Association of America (June 19, 2007); Thomas L. Montrone,
President and Chief Executive Officer, Registrar and Transfer
Company (June 19, 2007); Salli Marinov, President and Chief
Executive Officer, First American Stock Transfer Company (June 20,
2007); Steve Nelson, President and Chairman of the Board,
Continental Stock Transfer & Trust Company (June 20, 2007); Dennis
Callahan, Chairman, Bank Depository User Group (June 21, 2007);
Kevin Kopaunik, Fidelity Transfer Company (June 21, 2007); Jonathan
Miller, President StockTrans, Inc. (June 21, 2008); Artie Retolatto,
1st Global Stock Transfer, LLC (June 21, 2007); James R. Alden,
President, Shareholder Services Association (June 22, 2007); James
Becker, Zions First National Bank (June 22, 2007); J. Donald Boggus,
Jr., President and Chief Executive Officer, Crescent Banking Company
and Crescent Bank and Trust Company (June 22, 2007); Albert Howell,
Chairman, Regulatory and Clearance Committee, SIFMA Securities
Operations Division, (June 22, 2007); Lennie M. Kaufman, Executive
Vice President, Wells Fargo Shareowner Services (June 22, 2007);
Lawrence Morillo, Chairman, Legal and Regulatory Subcommittee, SIFMA
Operations Committee (June 22, 2007); J. Robert Morris, Managing
Director, Valiant Trust Company (June 22, 2007); Cristeena G. Naser,
Senior Counsel, Center for Securities, Trust & Investments, American
Bankers Association (June 22, 2007); James R. Nielsen, Senior Vice
President, U.S. Bank National Association (June 22, 2007); Charles
V. Rossi, President, The Securities Transfer Association, Inc. (June
22, 2007); Steven Rothbloom, President and Chief Executive Officer,
Computershare North America (June 22, 2007); William Speirs,
President, Securities Transfer Association of Canada (June 26,
2007); Susanne Trimbath, PhD, Chief Executive Officer and Chief
Economist, STP Advisory Services, LLC (June 26, 2007); Thomas M.
Sullivan, Chief Counsel for Advocacy, and Charles A. Maresca,
Director, Interagency Affairs, U.S. Small Business Administration
(June 27, 2007); Gary N. Nazare, Managing Director, Transfer Agency
Services, The Bank of New York (June 29, 2007); and Charles Douglas
Bethill, Thacher, Proffitt & Wood LLP (December 28, 2007).
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In response to commenters' concerns raised by the first two
amendments to DTC's proposed rule change, DTC amended its filing for a
third time. The Commission received ten comment letters to the third
amendment, with eight commenters continuing to oppose the filing \25\
and one commenter requesting clarification as to the application of one
of the requirements of the proposed rule change to issuer transfer
agents.\26\ In response to the concerns raised by these nine
commenters, DTC submitted a comment letter.\27\ The comments set forth
by those opposing the proposed rule change were for the most part the
same concerns as were expressed in the comment letters submitted in
response to the first notice of the first proposed rule change as
amended by Amendments 1 and 2.
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\25\ Letters from Charles V. Rossi, President, Securities
Transfer Association, Inc. (March 17, 2008); William Speirs,
President, Securities Transfer Association of Canada (March 18,
2008); Steven G. Nelson, Chairman of the Board and President,
Continental Stock Transfer & Trust Company (March 19, 2008); Martin
J. McHale Jr., President, US Equity Services, Computershare (March
20, 2008); Loren Hanson, Assistant Secretary, Otter Tail Corporation
(March 20, 2008); Kevin B. Halter, Jr., President, Securities
Transfer Corporation (March 20, 2008); Mary C. Fernandez, Standard
Registrar and Transfer Agency, Inc. (March 20, 2008); and Cristeena
G. Naser, Senior Counsel, Center for Securities, Trust &
Investments, American Bankers Association (March 20, 2008).
\26\ Letter from Ray Dunn, Director of Shareholder Services, The
Southern Company (March 20, 2008).
\27\ Letter from Charles Douglas Bethill, Thacher Proffitt &
Wood, LLP (on behalf of DTC) (April 10, 2008).
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After approximately one and a half years of negotiations between
DTC and the transfer agent community, DTC amended the proposed rule
change for a fourth and final time. The Commission received ten comment
letters in response to the proposed rule change as modified by
Amendment 4, with nine commenters opposing some or all of the proposed
rule and DTC again submitting a comment letter addressing the commenter
concerns.\28\ Seven of the nine commenters opposing the proposed rule
change expressed their concerns in response to one or both of the prior
published notices. None of the commenters opposing the proposed rule
change, as amended by the fourth amendment, raised any issues that had
not been raised in their prior comment letters.
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\28\ Letters from Martin J. McHale, President, U.S. Equity
Services, Computershare (July 2, 2008); Loren Hanson, Assistant
Secretary, Otter Tail Corporation (July 7, 2008); Charles V. Rossi,
President, The Securities Transfer Association, Inc. (July 9, 2008);
Kevin Kopaunik, Fidelity Transfer Company (July 10, 2008); Dorothy
Miller, Vice President & Trust Officer, Hancock Bank (July 10,
2008); Stephen G. Nelson, President and Chairman of the Board,
Continental Stock Transfer & Trust Company (July 10, 2008); William
Speirs, President, Securities Transfer Association of Canada (July
11, 2008); Barbara J. Trivedi, Shareholder Services Manager,
Crescent Banking Company, Crescent Bank and Trust Company (July 10,
2008); Edward L. Pittman, Thelen Reid Brown Raysman & Steiner LLP
(July 15, 2008); John Petrofsky, Associate Counsel, DTC (July 30,
2008).
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The majority of the nine commenters that opposed DTC's proposed
rule change, which were issuers, transfer agents, or industry
associations representing issuers or transfer agents, an insurance
company, an association representing insurance companies, the American
Banking Association (``ABA''), the Office of Advocacy of the Small
Business Administration (``SBA''), and one individual, opposed the
proposed rule change for various reasons. Most of the commenters raised
a number of general policy concerns such as: (1) DTC lacks the
authority to impose rules on transfer agents, and the imposition of
such rules is inappropriate given the commercial relationship between
transfer agents and DTC; (2) the specific requirements are unduly
burdensome, unnecessary, costly (particularly with respect to small
transfer agents), and without sufficient justification; (3) the
proposed rule change appears based on the premise that transfer agents
act as custodian for DTC's securities as recorded on the records of the
issuer--a premise that the transfer agents and banks reject as
erroneous; and (4) many of the provisions proposed by DTC are
inconsistent with the movement to a book-entry form of securities
ownership.
The remaining commenters, which were predominantly industry
associations representing broker-dealers, supported the proposed rule
change because of their belief that DTC's proposed requirements are
necessary to facilitate the continuing increase in the use of DRS,
which they contend is necessary in order to achieve the industry's
objective of decreasing or eliminating the use of securities
certificates in the U.S. market, and to reduce the risks associated
with the continuing increase in volume and value of DRS transactions.
The following describes commenters' concerns with the specific
provisions remaining in DTC's proposed rule
[[Page 33501]]
change in its final form after all amendments.
Jurisdiction. Many of the commenters who are transfer agents or
organizations representing transfer agents oppose the proposed rule
change because they contend that the Commission and banking regulators
are statutorily charged with the responsibility of regulating transfer
agents, and DTC is not. They further argue that even though the
transfer agents are ``limited participants'' of DTC with respect to
their participation in DRS, transfer agents do not have the full
procedural safeguards that statutorily exist for DTC participants
pursuant to Section 17A of the Exchange Act.\29\ The transfer agents
are also concerned that the rule change gives DTC ``unfettered''
discretion to decide which transfer agents are eligible to participate
in DRS, to impose significant requirements to change transfer agent
systems and operations, and to terminate transfer agents as FAST agents
and limited participants at DTC's discretion.
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\29\ 15 U.S.C 78q-1(a)(3).
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Insurance Requirements. Almost all of those opposed to DTC's rule
filing objected to some or all of DTC's proposed insurance requirements
as being too costly and too onerous, particularly the ``excessively''
high minimum coverage levels, ``excessively'' low deductibles, and
opposed the requirement of notifying DTC of changes in their insurance
policies. The STA and several other commenters stated that they believe
DTC and other registered holders have sustained virtually no economic
losses as a result of under-insured transfer agent activity, thereby
making the proposed insurance requirements unnecessary, overly broad,
and without justification.
Many of the commenters that oppose the rule change contend that for
some smaller transfer agents, the amounts of proposed minimum insurance
coverage would exceed the value of DTC's securities held by the
transfer agent and therefore are not reasonable. One commenter
representing a large number of commercial bank and non-bank transfer
agents noted that it believes that none of its members currently meet
the insurance and deductible requirements.\30\ In addition, this
commenter along with the ABA and several other transfer agents opposed
the requirement for transfer agents to (1) notify DTC at least 30 days
prior to any expiration or change in insurance limits as unrealistic
due to the manner in which policies are renewed, and (2) notify DTC
within five days of any notice of threatened or actual lapse in
coverage as an unreasonable burden on insurance carriers.
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\30\ Letter from the Securities Transfer Association (``STA'').
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Safekeeping Requirements. Most transfer agents that opposed the
amended proposed rule change took issue with DTC dictating specific
physical security standards with respect to transfer agents'
safeguarding obligations. Many of these commenters suggested that the
Commission's safekeeping rule, Rule 17Ad-12, is sufficient to govern
transfer agent safeguarding obligations.
DTC maintains that specific physical security standards are
justified in light of transfer agents holding blank securities
certificates, which can and have been fraudulently issued or endorsed.
Audit Requirements. Almost all the commenters opposing the proposed
rule change objected to some or all of DTC's proposed audit
requirements. Most of the transfer agents and industry associations
representing issuers and agents argued that requiring submission to DTC
of a SAS 70 or SSAE-19 report certifying compliance with DTC
requirements and Commission rules and requiring attesting to the
soundness of the transfer agent's controls is superfluous, unwarranted,
and costly, especially in light of the requirement that an audit report
be filed with the Commission by registered transfer agents pursuant to
Exchange Act Rule 17Ad-13. The transfer agents contended that the
existing Commission regulations should be sufficient to satisfy DTC's
concerns.
One issuer acting as its own transfer agent stated its belief that
DTC rules have been developed to address large commercial transfer
agent operations without taking into consideration other types of
transfer agents. This commenter noted that pursuant to an exemption
provided to small transfer agents under Commission Rule 17Ad-4, it is
exempted from the Commission's audit requirements. This commenter
stated that small transfer agents pose significantly less risk to the
public than large commercial transfer agents, thereby providing the
basis for the Commission's exemption. This comment also argued that as
a publicly traded company, it has audit requirements, including
internal controls that are audited internally and externally pursuant
to federal regulation. Compliance with DTC's rules, this transfer agent
estimated, would cost in excess of $10,000 per year for the audit when
it conducts less than 1,000 transfers per year.
Shareholder Statements. Many transfer agents objected to DTC
requiring that for DRS withdrawal-by-transfers, DRS Limited
Participants send a transaction advice to shareholders by mail and to
DTC by electronic file. While the concept of sending such statements
was not objectionable to most of the transfer agents opposing this
requirement, the STA maintains that DTC has no authority to mandate
notifications to shareholders holding positions in DRS.
Notice of Regulatory Action and On-site Inspection by DTC. The STA
and a number of transfer agents opposed the requirement to provide DTC
with copies of Commission examination reports within five business days
of ``any alleged material deficiencies.'' The transfer agents contend
they do not provide this information to any other registered
securityholder, DTC has failed to demonstrate a need for such
information, and DTC is not entitled to this confidential information
under applicable law or regulation. They also objected to the
requirement that transfer agents allow DTC access to their premises for
on-site inspections.
System Modifications and Enhanced DRS Processing Capabilities. The
STA and a number of transfer agents objected to DTC requiring transfer
agents to implement program changes and system modifications to support
and expand DRS processing capabilities. The transfer agents contend
that such a requirement fails to address the reasonableness and
necessity of any changes and fails to address the costs that may be
incurred by transfer agents. Transfer agents objected to DTC
unilaterally determining what changes to make to FAST and DRS without
agreement from the transfer agents. They also objected to the use of
the DRS Ad Hoc Committee as the ultimate arbiter of disputes because
they believe the Committee is dominated by DTC and its participants and
because the Committee has no governing by-laws or rules.
Compensation. The STA objected as commercially unreasonable that
transfer agents provide DRS and FAST services to DTC without
compensation. It argued that transfer agents should be entitled to
refuse to provide DTC services if DTC refuses to pay for services
rendered without the threat that DTC could throw them out of FAST and
DRS.
Standard of Care. Transfer agents opposed DTC's standard of care
provision because they believe that it would permit DTC to avoid
responsibility for its own errors and would force transfer agents to be
responsible if a third party (i.e., broker-
[[Page 33502]]
dealer or registered shareholder) were to suffer a loss caused by an
error at DTC with regard to transactions or transfers involving
transfer agents. They contend that the exculpatory language would force
injured parties to seek recovery from the transfer agent even in the
event the transfer agent were not at fault instead of each party
bearing responsibility for its own processing errors. The transfer
agents state that a unilateral waiver would not be in accordance with
standard industry practice or public policy.
Regulatory Flexibility Act of 1980. The transfer agents contend
that no evidence of any assessment has been done by DTC to examine the
economic impact on small transfer agents or small issuers to ensure
compliance with the requirements of the Regulatory Flexibility Act of
1980.\31\
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\31\ The Commission notes that the Regulatory Flexibility Act of
1980 is not applicable to proposed rule changes filed by self-
regulatory organizations pursuant to Section 19(b) of the Exchange
Act.
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IV. Discussion
Section 17A(b)(3)(F) of the Act requires that the rules of a
clearing agency be designed to promote the prompt and accurate
clearance and settlement of securities transactions, to assure the
safeguarding of securities and funds which are in the custody or
control of the clearing agency or for which it is responsible, to
foster cooperation and coordination with persons engaged in the
clearance and settlement of securities transactions, and to remove
impediments to and perfect the mechanism of a national system for the
prompt and accurate clearance and settlement of securities
transactions, and in general, to protect investors and the public
interest.\32\ For the reasons described below, the Commission finds
that the rule change as amended is consistent with these provisions of
Section 17A.
---------------------------------------------------------------------------
\32\ 15 U.S.C. 78q-1(b)(3)(F).
---------------------------------------------------------------------------
In Section 17A of the Act, Congress set forth its finding that the
prompt and accurate clearance and settlement of securities
transactions, including the transfer of record ownership and
safeguarding of securities and funds related to clearance and
settlement activities, is necessary for the protection of investors and
those acting on behalf of investors.\33\ Inefficient clearance and
settlement procedures, Congress found, impose unnecessary costs on
investors and those acting on their behalf.\34\ The Commission's
approval of DTC's registration as a clearing agency constituted an
important step in its efforts to facilitate the development of a
national clearance and settlement system and a significant step in
achieving the goals established by Congress.\35\
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\33\ 15 U.S.C. 78q-1(a)(1)(A).
\34\ 15 U.S.C. 78q-1(a)(1)(B).
\35\ Exchange Act Release No. 20221 (September 23, 1983), 48 FR
45167 (October 3, 1983).
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Consistent with this directive, the Commission has encouraged the
immobilization and the dematerialization of securities holdings by
supporting the use of alternatives to holding securities in
certificated form in an effort to improve efficiencies and decrease
risks associated with processing securities certificates.\36\ 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 \37\ and require
that before any security can be listed for trading, it must have been
made depository eligible if possible.\38\ The Commission has also
approved a number of rule filings relating to DTC's FAST program, which
has facilitated significantly more efficient processing of transfers by
eliminating the physical delivery of securities certificates between
transfer agents and DTC.\39\ More recently the Commission has approved
the implementation and expansion of DRS by approving DTC's rules
relating to the administration of DRS facilities used by transfer
agents and broker-dealers.\40\
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\36\ The use of certificates often results in significant delays
and expenses in processing securities transactions and raises safety
concerns associated with lost, stolen, and counterfeit certificates.
The concerns associated with lost certificates were dramatically
demonstrated during the September 11, 2001, tragedy when tens of
thousand of certificates maintained in broker-dealers' vaults either
were destroyed or were unavailable for transfer. See 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).
\37\ 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).
\38\ Securities Exchange Act Release No. 35798 (June 1, 1995),
60 FR 30909 (June 12, 1995) (order approving rules setting forth
depository eligibility requirements for issuers seeking to have
their shares listed on the exchange).
\39\ Securities Exchange Act Release Nos. 13342 (March 8, 1977)
[File No. SR-DTC-76-3]; 14997 (July 26, 1978) [File No. SR-DTC-78-
11]; 21401 (October 16, 1984) [File No. SR-DTC-84-8]; 31941 (March
3, 1993) [SR-DTC-92-15]; and 46956 (December 6, 2002) [File No. SR-
DTC-2002-15].
\40\ See supra note 10.
---------------------------------------------------------------------------
DTC's FAST program authorizes transfer agents to hold securities on
behalf of DTC in order to avoid having multiple physical certificates
sent between transfer agents and DTC because of DTC's ever-changing
ownership positions. Eliminating the need to transfer a physical
certificate every time DTC's ownership position changes reduces risk
and costs of processing transfers, which is a benefit to not only DTC,
transfer agents, and issuers but also to the millions of beneficial
owners of the securities holding in street name at DTC.
Because of the critical role the FAST and DRS programs play in the
clearance and settlement of transactions in securities, which are
legally owned by DTC and beneficially owned by DTC participants and
their customers, the Commission believes that DTC has a legitimate
interest in making sure that FAST agents and DRS Limited Participants
comply with reasonable and appropriate requirements for participation
in these programs in order that DTC can fulfill its statutory
obligation to safeguard securities and funds that are in its custody or
control or for which it is responsible. In response to the comments
submitted in response to the proposed rule changes, DTC amended its
proposal four times in an effort to reduce the cost and operational
burden on transfer agents while still maintaining the appropriate level
of safeguards necessary for DTC to comply with its statutory
obligations. The Commission believes that the requirements, as amended,
are fair and reasonable in light of the vital function the FAST and DRS
programs play in the national clearance and settlement system and
should help further improvements in the interactions between transfer
agents and DTC, which is an essential component of improving the
industry's dematerialization efforts.
In adopting these new rules, the Commission does not believe that
DTC is attempting to ``regulate'' transfer agents as some commenters
contended. Rather, the Commission believes that DTC is imposing
reasonable obligations necessary for it to comply with its statutory
obligations and only on those transfer agents that choose to
participate in its FAST and DRS programs. Further, as a self-regulatory
organization, DTC is required to file rule changes affecting the FAST
or DRS program, and by extension, those transfer agents participating
in these programs, with the Commission pursuant to Section
[[Page 33503]]
19(b) of the Exchange Act. Most of these filings have been and will
continue to be filed with the Commission, published for public comment,
and subject to the review and approval by the Commission. This process
should provide transfer agents, as well as others affected by DTC's
rules, adequate procedural safeguards.
Some commenters contend that by allowing DTC the authority to
determine which transfer agents may become a FAST transfer agent or DRS
Limited Participant, DTC is also granted by extension the authority to
determine which transfer agents may continue to operate a transfer
agent business. The Commission does not agree. Many transfer agents act
as transfer agent for publicly traded securities and are not FAST
agents or DRS Limited Participants. But if a transfer agent chooses to
act as transfer agent for an issuer of securities that requires it to
become a FAST agent or DRS Limited Participant, then DTC has an
interest and statutory responsibility to ensure that the securities
held on its behalf at the transfer agent are safeguarded and that the
settlement of transactions in those securities, which includes safe and
efficient transfers in ownership, occurs in a prompt and accurate
manner.
With regards to specific operational requirements required by DTC's
rule, such as insurance requirements, physical security standards,
audit requirements, and system modifications to support or enhance DRS
functionality, the Commission believes that the amended rule contains
standards that are appropriate and reasonably designed to achieve DTC's
goal of protecting the securities held by transfer agents on DTC's
behalf and on behalf of DTC's participants and the participants'
customers. The Commission does not find it compelling to contend that
just because DTC and other registered holders have not sustained
economic losses, DTC's insurance requirements are overly broad or
unjustified. The point of the rule's insurance requirement is to
protect against losses before losses occur. Furthermore, if a transfer
agent can demonstrate that its existing coverage or capitalization
provide similar protections as the insurance required DTC, DTC has the
discretion to grant a waiver from any or all of the requirement. This
flexibility should provide DTC the ability to properly address
situations where the required coverage is too onerous or ineffective
for the type, amount, or dollar value of DTC's securities held by the
transfer agent.
The Commission also finds little merit in the contention that the
audit reports required by the rule are unwarranted or unnecessarily
costly. The Commission believes that requiring transfer agents to
provide to DTC the Annual Study of Evaluation of Internal Accounting
Controls, conducted pursuant to Rule 17Ad-13, and a SAS-70 audit
report, if the agent has already obtained such a report for other
purposes, are reasonable in light of DTC's statutory obligations to
ensure the safeguarding of its securities. These audit reports provide
DTC with additional information about the adequacy of the transfer
agent's operational capabilities and internal controls for the transfer
of record ownership and the safeguarding of related securities and
funds. This is not only relevant but material information to DTC. In
addition, because DTC's rule requires that transfer agents provide DTC
with documents that have already been produced by the transfer agent
for other purposes and should be in the transfer agent's possession,
the Commission believes that there should be little or no additional
expense and relatively little extra burden on transfer agents in
providing these documents to DTC.
Similarly, commenters' concerns about requiring transfer agents to
provide DTC with a copy of the two most recent compliance or deficiency
correspondences from the Commission and all notices of alleged material
deficiencies documented by the Commission appear to be misplaced. While
the Commission appreciates the sensitive nature of transfer agent
examination reports and the need to ensure the confidentiality of all
information contained in those reports, the Commission believes
nonetheless that DTC's request for these documents is reasonable.
Information contained in those reports should allow DTC to better
manage any potential risks associated with the transfer agent's ability
to transfer securities, maintain ownership records, or operate its
business in a safe manner.
Even though some commenters objected to DTC's provision requiring
transfer agents to send DTC a file indicating a transaction advice has
been sent to investors for each DRS withdrawal-by-transfers, the
Commission believes DTC has a valid interest in requiring notice that
investors have obtained a transaction advice from transfer agents. The
file required to be sent to DTC will provide confirmation that the
transaction advice has been sent to the investor so that DTC can close
out its pending transfer position or file (sometimes referred to as an
open transfer record). If that position is not closed, then DTC's
records will show that the transfer remains open and it will become an
outstanding aged transfer. To avoid this, DTC is requiring transfer
agents to send a notice that the transfer has been completed by sending
the investor a transaction advice. This process is similar to that of
the current process when a transfer agent notifies DTC that a
certificate has been mailed to the investor.
Finally, the Commission believes that commenters' concerns
regarding the rule's clarification of DTC's standard of care provision
are unfounded. The purpose of the rule change is to clarify that DTC
shall not be liable to participants for acts or omissions of any third
party (including without limitation any depository, custodian, sub-
custodian, clearing or settlement system, transfer agent, registrar,
data communication service or delivery service). DTC's Rule 6 applies
to DTC's relationship with its participants, not FAST agents.
Therefore, this particular provision does not have any impact on FAST
Agents that are not also participants. The provision does not shift
liability from DTC to FAST Agents or absolve DTC from liability to FAST
Agents.
V. Conclusion
On the basis of the foregoing, the Commission finds that the
proposed rule change, as amended, 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, as amended, (File No. SR-DTC-2006-16) be and hereby is
approved.\41\
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\41\ In approving the proposed rule change, the Commission
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\42\ 17 CFR 200.30-3(a)(12).
For the Commission by the Division of Trading and Markets,
pursuant to delegated authority.\42\
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-16455 Filed 7-10-09; 8:45 am]
BILLING CODE 8010-01-P
