Self-Regulatory Organizations; The Depository Trust Company; Notice of Filing of Proposed Rule Change To Specify Procedures Available to Issuers of Securities Deposited at DTC for Book Entry Services When DTC Imposes or Intends To Impose Restrictions on the Further Deposit and/or Book Entry Transfer of Those Securities, 77755-77761 [2013-30595]
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Federal Register / Vol. 78, No. 247 / Tuesday, December 24, 2013 / Notices
IV. Solicitation of Comments
change is substantially similar to
existing FINRA Rule 4240.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CBOE does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Specifically,
the Exchange believes that, by extending
the expiration of the Program, the
proposed rule change will allow for
further analysis of the Program and a
determination of how the Program shall
be structured in the future. In doing so,
the proposed rule change will also serve
to promote regulatory clarity and
consistency, thereby reducing burdens
on the marketplace and facilitating
investor protection.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received from
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
emcdonald on DSK67QTVN1PROD with NOTICES
Because the foregoing proposed rule
change does not:
A. Significantly affect the protection
of investors or the public interest;
B. impose any significant burden on
competition; and
C. become operative for 30 days from
the date on which it was filed, or such
shorter time as the Commission may
designate, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act 10 and Rule 19b–4(f)(6) 11
thereunder.
At any time within 60 days of the
filing of the proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission will institute proceedings
to determine whether the proposed rule
change should be approved or
disapproved.
10 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). As required under Rule
19b–4(f)(6)(iii), the Exchange provided the
Commission with written notice of its intent to file
the proposed rule change, along with a brief
description and the text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change, or such
shorter time as designated by the Commission.
11 17
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Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.12
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–30590 Filed 12–23–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2013–123 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–CBOE–2013–123. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2013–123 and should be submitted on
or before January 14, 2014.
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[Release No. 34–71132; File No. SR–DTC–
2013–11]
Self-Regulatory Organizations; The
Depository Trust Company; Notice of
Filing of Proposed Rule Change To
Specify Procedures Available to
Issuers of Securities Deposited at DTC
for Book Entry Services When DTC
Imposes or Intends To Impose
Restrictions on the Further Deposit
and/or Book Entry Transfer of Those
Securities
December 18, 2013.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on December
5, 2013, The Depository Trust Company
(‘‘DTC’’) filed with the Securities and
Exchange Commission (‘‘Commission’’)
the proposed rule change described in
Items I, II and III below, which Items
have been prepared by DTC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Clearing Agency’s Statement of the
Terms of Substance of the Proposed
Rule Change
The proposed rule change modifies
DTC’s Rules & Procedures (‘‘Rules’’) to
specify procedures available to issuers
of securities deposited at DTC for book
entry services when DTC imposes or
intends to impose restrictions on the
further deposit and/or book entry
transfer of those securities, as more fully
described below.
II. Clearing Agency’s Statement of the
Purpose of, and Statutory Basis for, the
Proposed Rule Change
In its filing with the Commission,
DTC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. DTC has prepared
summaries, set forth in sections (A), (B),
12 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 78, No. 247 / Tuesday, December 24, 2013 / Notices
and (C) below, of the most significant
aspects of such statements.
(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
emcdonald on DSK67QTVN1PROD with NOTICES
Purpose
A. Background: DTC’s Role Under
Section 17A of the Securities Exchange
Act of 1934, as amended (captioned
‘‘National System for Clearance and
Settlement of Securities Transactions’’)
DTC is the nation’s central securities
depository, registered as a clearing
agency under Section 17A of the
Exchange Act (‘‘Section 17A’’).3 DTC
performs services and maintains
securities accounts for its participants,
primarily banks and broker dealers
(‘‘Participants’’).4 Among the services
DTC provides to its Participants, a
Participant may present a Security (as
defined in Rule 1, Section 1 of the DTC
Rules) to be made eligible for DTC’s
depository and book-entry services and,
if the Security is accepted by DTC as
eligible for those services and is
deposited with DTC for credit to the
securities account of a Participant, it
becomes an ‘‘Eligible Security’’ (as
defined in Rule 1, Section 1 of the DTC
Rules). (The determination of eligibility
is described more fully in Section 3.B.,
below.) Thereafter, other Participants
may deposit that Eligible Security into
their respective DTC accounts. Once the
Eligible Security is credited to the
account of one or more Participants,
interests in that Eligible Security may be
transferred among Participants by bookentry in accordance with the DTC Rules
and Procedures.
As provided in the DTC Rules and
Procedures, DTC processes the transfer
of interests in Eligible Securities among
DTC Participants by credits and debits
to Participant accounts in accordance
with the instructions of delivering and
receiving Participants who are parties to
the transaction. Participants in DTC
agree to be bound by the Rules and
Procedures of DTC as a condition of
membership.
To facilitate book-entry transfer and
other services that DTC provides for its
Participants with respect to Deposited
Securities (as defined in Rule 1, Section
1 of the DTC Rules), Eligible Securities
are registered on the books of the issuer
(typically, in a register maintained by a
transfer agent) in DTC’s nominee name,
Cede & Co. Eligible Securities of an
issue deposited at DTC are maintained
3 See Securities Exchange Act Release No. 20221
(Sept. 23, 1983), 48 FR 45167 (Oct. 3, 1983).
4 See 15 U.S.C. 78c(a)(24).
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in ‘‘fungible bulk;’’ i.e., each Participant
to whose DTC account securities of that
issue have been credited has a pro rata
(proportionate) interest in DTC’s entire
inventory of that issue, but none of the
securities on deposit is identifiable to or
‘‘owned’’ by any particular Participant.5
DTC’s deposit and book-entry transfer
services facilitate the operation of the
nation’s securities markets. By serving
as registered holder of trillions of
dollars of securities, DTC processes the
enormous volume of daily securities
transactions by the book-entry
movement of interests, without the need
to transfer physical certificates.
The Commission has recognized that
DTC plays a ‘‘critical function’’ in the
national system for securities clearance
and settlement.6 More recently, the
federal Financial Stability Oversight
Council, which was established
pursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act,
designated DTC as a Systemically
Important Financial Market Utility (as
defined therein).7
B. Eligibility Standards for Securities
are Set Forth in DTC Rules and
Procedures
In furtherance of Section 17A’s
requirement that DTC’s Rules be
‘‘designed to promote the prompt and
accurate clearance and settlement of
securities transactions . . . and, in
general, to protect investors and the
public interest,’’ DTC’s Rules and
Procedures provide standards for
determining eligibility.8
DTC Rule 5 authorizes DTC to
determine whether to accept a security
as an Eligible Security and when an
Eligible Security will cease to be such.
DTC Rule 6 provides that DTC ‘‘may
limit certain services to particular issues
of Eligible Securities.’’
DTC’s Operational Arrangements,
Section I.A.2., addresses specific
standards for making a security an
Eligible Security:
Generally, the issues that may be
made eligible for DTC’s book-entry
5 See Securities Exchange Act Release No. 19678
(Apr. 15, 1983), 48 FR 17603, 17605, n.5 (Apr. 25,
1983) (describing fungible bulk); see also N.Y.
Uniform Commercial Code, § 8–503, Off. Cmt 1
(‘‘. . . all entitlement holders have a pro rata
interest in whatever positions in that financial asset
the [financial] intermediary holds’’).
6 See Securities Exchange Act Release No. 47978,
Order Granting Approval of a Proposed Rule
Change Concerning Requests for Withdrawal of
Certificates by Issuers, 68 Fed. Reg. 35037, 35041
(Jun. 4, 2003).
7 See https://www.treasury.gov/initiatives/fsoc/
designations/Pages/default.aspx.
8 See DTC Rule 5, https://www.dtcc.com/legal/
rules_proc/dtc_rules.pdf; see also Operational
Arrangements (Jan. 2012), Section I.A., available at
https://www.dtcc.com/downloads/legal/rules_proc/
eligibility/operational-arrangements.pdf.
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delivery, settlement and depository
services are those that have been issued
in a transaction that: (i) Has been
registered with the Commission
pursuant to the Securities Act of 1933
(‘‘Securities Act’’); (ii) was exempt from
registration pursuant to a Securities Act
exemption that does not involve (or, at
the time of the request for eligibility no
longer involves) transfer or ownership
restrictions; or (iii) permits resale of the
securities pursuant to Rule 144A or
Regulation S and in all cases such
securities otherwise meet DTC’s
eligibility criteria.
Thus, an essential element of DTC
eligibility is that the securities are
‘‘freely tradeable’’ or, if restricted by
Rule 144A or Reg S, are processed
through a separate program in which
Participants acknowledge and agree to
comply with the applicable restrictions.
In determining whether deposited
securities satisfy DTC’s eligibility
requirements, Section I.B.2. of DTC’s
Operational Arrangements provides that
DTC may require an issuer to provide an
opinion from outside counsel in order
‘‘to substantiate the legal basis for
eligibility.’’ 9 Additionally, DTC may
require legal opinions, inter alia,
otherwise ‘‘. . . to protect DTC and its
Participants from risk.’’ 10 That is, DTC
may require the issuer’s outside counsel
to provide a legal opinion in support of
the eligibility determination.
C. DTC’s Compliance Monitoring
Program and Imposition of Deposit
Chills and Global Locks
DTC maintains a robust system for
monitoring its compliance with
governing law including, without
limitation, the AML requirements of the
BSA, and OFAC sanctions.11
Where such monitoring raises
concerns as to whether securities held at
DTC have been distributed in violation
of federal law including, without
limitation, the requirements of Section 5
9 Section I.A.1 of the Operational Arrangements
further specifies that such counsel must be ‘‘an
experienced securities practitioner, licensed to
practice law in the relevant jurisdiction and in good
standing in any bar to which such practitioner is
admitted. Such counsel must be engaged in an
independent private practice (i.e., not in-house
counsel) and may not have a beneficial ownership
interest in the security for which the opinion is
being provided or be an officer, director or
employee of the Issuer. ’’
10 Id.
11 See 31 U.S.C. 5318 (authorizing Secretary of
the Treasury to require financial institutions to
establish AML procedures); 31 CFR 1020.210 (AML
standards for certain financial institutions); 31 CFR
500.202 (prohibiting, inter alia, dealing in a security
registered in the name of a person subject to OFAC
sanctions).
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Federal Register / Vol. 78, No. 247 / Tuesday, December 24, 2013 / Notices
of the Securities Act,12 DTC may impose
a Deposit Chill or Global Lock.
There are two principal scenarios
under which DTC imposes these
restrictions, as described in more detail
below.
emcdonald on DSK67QTVN1PROD with NOTICES
(1) Deposit Chills: Large Volume
Deposits
DTC is mindful that various
regulatory agencies have identified
unusually large volumes of deposits of
unregistered shares of low priced or
thinly-traded securities as a ‘‘red flag’’
for possible unlawful distribution of
securities.
For instance, in pursuing an
enforcement action with respect to
illegal sales of penny stocks, the
Commission has highlighted as
problematical ‘‘sales that represented a
high percentage of trading volume or of
an issuer’s public float.’’ 13
Similarly, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
has advised broker-dealers to be on alert
for ‘‘red flags’’ of possible illegal
distribution of unregistered securities.
Although DTC is not subject to FINRA
oversight, DTC has nonetheless taken
account of FINRA’s ‘‘red flags’’ in
considering if Deposited Securities
continue to comply with DTC’s
eligibility requirements. As stated by
FINRA:
Recently, FINRA has investigated and
brought several enforcement actions
concerning unregistered distributions of
securities. A common theme in these
cases was that firms resold large
amounts of low-priced equity securities
in over-the-counter transactions.
The following are examples of red
flags of unlawful unregistered
distributions . . .;
• A customer of the broker opens a
new account and delivers physical
certificates representing a large block of
thinly traded or low-priced securities;
• A customer of the broker deposits
share certificates that are recently issued
or represent a large percentage of the
float for the security;
• The company was a shell company
when it issued the shares;
• A customer of the broker with
limited or no other assets under
12 See 15 U.S.C. 77e (prohibiting sales of
unregistered securities, subject to 15 U.S.C. 77(d)).
13 See e.g. Order Making Finding and Imposing
Remedial Sanctions, In the Matter of Ronald S.
Bloomfield, et al., SEC Rel. No. 62750 (Aug 20,
2010), available at https://www.sec.gov/litigation/
admin/2010/34-62750.pdf (enumerating red flags
relating to how penny stocks were sold, including
(a) repeated delivery in and selling to the public of
privately obtained shares of penny stocks; (b)
selling within weeks of receipt; (c) selling while
promotional activity was occurring; and (d) sales
that represented a high percentage of trading
volume or of an issuer’s public float).
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77757
management at the firm receives an
electronic transfer or journal
transactions of large amounts of lowpriced, unlisted securities;
• The issuer has been through several
recent name changes, business
combinations or recapitalizations, or the
company’s officers are also officers of
numerous similar companies;
• The issuer’s SEC filings are not
current, are incomplete, or
nonexistent.14
The federal Financial Crimes
Enforcement Network (‘‘FinCen’’),
which is responsible for enforcing the
AML provisions of the BSA, has
similarly recognized that ‘‘substantial
deposit, transfer or journal of very lowpriced and thinly traded securities’’
implicates anti-money laundering
monitoring concerns.15
When DTC detects large volume
deposits of a low-priced or thinly-traded
security, and its monitoring otherwise
suggests that an issue may not be freelytradeable, it imposes a Deposit Chill on
that issue. The Deposit Chill blocks the
deposit of further securities of the issue,
although other services, including bookentry transfer movements, continue to
be provided with respect to the Eligible
Securities deposited at DTC before the
Deposit Chill.
Section 2 of proposed Rule 22(A)
addresses the procedures by which DTC
gives affected issuers notice of a Deposit
Chill and the procedures they may
follow to object to the restriction, under
the standards discussed in Section D(1),
below.
Section 2 also provides that if an
issuer fails to respond to a notice of a
Deposit Chill as required, or if DTC
determines that the response is
insufficient to establish that Deposited
Securities satisfy DTC’s eligibility
requirements, a Global Lock will be
instituted. Under such circumstances,
an issuer would be given notice of the
impending Global Lock and an
opportunity to demonstrate that a
response to the Deposit Chill notice had,
in fact, been submitted or that in
reviewing the response, DTC had made
a clerical mistake or oversight.
14 See Financial Industry Regulatory Authority,
Inc., Regulatory Notice 09–05, available at https://
www.finra.org/web/groups/industry/@ip/@reg/@
notice/documents/notices/p117716.pdf (footnotes
omitted); see also Review of Disciplinary Action
Taken by FINRA, In the Matter of the Application
of World Trade Financial Corp., et al., Securities
Exchange Act Release No. 66114, Jan. 6, 2012,
available at
https://sec.gov/litigation/opinions/2012/3466114.pdf (sustaining FINRA violations and
sanctions, where customers deposited large blocks
of recently issued, little known stock into firm
accounts and directed registered representative to
sell shortly thereafter, and registered representative
failed to inquire whether proposed sales qualified
for exemption from registration and were part of an
unlawful distribution.); Order Accepting
Settlement, Dept. of Enforcement v. NevWest
Securities Corp et al., NASD Case No.
E0220040112–01 (Mar. 13, 2007), available at
https://wwv.sec.gov/about/offices/ocie/am12007/
nasdnev-nevwest.pdf (finding that NevWest failed
to adequately implement anti-money laundering
procedures by failing adequately to perform due
diligence, file Suspicious Activity Reports, or cease
trading in multiple accounts owned and controlled
by customer, regarding over 500 transactions
involving more than 250 billion shares of subpenny stock.)
15 Financial Crimes Enforcement Network, The
SAR Activity Review: Trends Tips & Issues, Issue
15, pp. 23–25 (BSA Advisory Group, May 2009),
available at https://fincen.gov/news_room/rp/files/
sar_tti_15.pdf, citing Financial Industry Regulatory
Authority, Inc., Regulatory Notice 09–05, available
at https://www.finra.org/Industry/Regulation/
Notices/2009/P117713; see also Financial Crimes
Enforcement Network, The Role of Domestic Shell
Companies in Financial Crime and Money
Laundering (2006), available at https://
www.fincen.gov/LLCAssessment_FINAL.pdf
(‘‘These ‘pump and dump’ schemes often involve
shell companies with low market capitalization
whose stock trades at pennies per share on the ‘pink
sheets’ (www.pinksheets.com), OTC Bulletin Board,
or other over-the-counter trading and information
systems. One indicator of this scheme is
concentrated trading in normally thinly traded
stocks.’’).
(2) Global Locks: Enforcement
Proceedings
When DTC becomes aware of a lawenforcement or regulatory proceeding
alleging violations of federal law or
regulations (an ‘‘Enforcement
Proceeding’’), particularly those alleging
any violation of Section 5 of the
Securities Act, relating to securities of
an issue on deposit at DTC, DTC
imposes a Global Lock on that issue. A
Global Lock prevents additional
deposits and restricts all book-entry and
related depository services with respect
to the issue.16
Sections 2, 3 and 4 of proposed Rule
22(B) address the procedures by which
DTC gives affected issuers notice of the
Global Lock and the procedures they
may follow to object to the restriction,
under the standards discussed in
Section D(2), below.
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D. Grounds for Releasing Deposit Chills
and Global Locks
The fair procedures set forth in
proposed Rules 22(A) and (B) are
designed to enable issuers to object to a
Deposit Chill or Global Lock prior to
imposition of the restriction by DTC or
16 Globally Locked Eligible Securities continue to
be Eligible Securities unless and until DTC makes
a determination under its Rules to terminate
eligibility, as to which DTC Rule 22, Right to
Contest Decisions, would apply; alternatively, those
securities may be held in custody only at DTC, as
provided in the DTC Rules and Procedures
applicable to custody only, i.e., not for book-entry
transfer and asset services applicable to Eligible
Securities. See generally https://www.dtcc.com/
products/asset/services/custody.php#overview.
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to cause DTC to release Deposit Chills
and Global Locks imposed without such
prior notice or at any time during the
continuance of any such restriction,
pursuant to the standards set forth
below.
(1) Release of Deposit Chills
In order to challenge a Deposit Chill,
proposed Rule 22(A) provides the
affected issuer with the opportunity to
establish that the issue meets DTC’s
eligibility requirements, including by
submitting an opinion from
independent legal counsel establishing
that the securities deposited at DTC are
freely tradeable. DTC’s reliance on legal
opinions for this purpose is authorized
by DTC’s Operational Arrangements,
which expressly authorize DTC to
require opinions ‘‘to substantiate the
legal basis for eligibility,’’ or otherwise
‘‘. . . to protect DTC and its Participants
from risk.’’ 17 If the issuer successfully
demonstrates that the deposited
securities continue to satisfy DTC’s
eligibility requirements, DTC would not
impose the Deposit Chill or, if already
in effect, would release it.
emcdonald on DSK67QTVN1PROD with NOTICES
(2) Release of Global Locks
In order to challenge a Global Lock,
proposed Rule 22(B)(2)(b) provides the
affected issuer with the opportunity to
establish that (i) DTC has made a
mistake in associating the issuer’s
Eligible Securities with the specified
Enforcement Proceeding or (ii) that the
Enforcement Proceeding has been has
been withdrawn or dismissed on the
merits with prejudice or otherwise
resolved in a final, non-appealable
judgment in favor of the defendants
allegedly responsible for the alleged
violations of Section 5 of the Securities
Act relating to the Eligible Securities. If
the issuer successfully demonstrates
either factor, DTC would not impose the
Global Lock or, if already in effect, DTC
would release it.
Otherwise, proposed Rule 22(B)(3)
provides that DTC will release a Global
Lock within either one year or six
months, as the case may be,18 after the
final disposition of the Enforcement
Proceeding with respect to those
defendants alleged to have been
responsible for the illegal distribution of
the Eligible Securities that were subject
17 See, supra, n.11; see also DTC Rule 5
(providing that DTC ‘‘shall accept a Security as an
Eligible Security only . . . upon such inquiry, or
based upon such criteria, as the Corporation may,
in its sole discretion, determine from time to
time.’’).
18 Six months applies to issuers that are required
to file, and have filed, all reports pursuant to
Sections 13(a) or 15(d) of the Exchange Act, and one
year applies to issuers that are not publicly
reporting.
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to the Global Lock. Similarly, pursuant
to proposed Rule 22(B)(4), where a
Global Lock has been imposed because
an issuer has failed to satisfy DTC’s
concerns that led to a Deposit Chill,19
the one year/six month waiting period
also applies, but runs from the date of
the imposition of the Global Lock.
The proposed standard to release a
Global Lock after the passage of six
months or one year (from the
appropriate starting date) was
developed by analogy to the safe harbor
provision of the Securities Act, Rule
144, which, under certain
circumstances, permits the unregistered
resale of restricted securities (as defined
under paragraph (a)(3) of the Rule) after
expiration of the relevant holding
period. However, again by reference to
Rule 144, this approach is not
applicable to an issuer that is, or was,
a shell company as defined in Rule
144(i)(1), unless the issuer has filed the
specified disclosure required by Rule
144(i)(2).
E. Legal Principles Underlying Fair
Procedures Challenging Deposit Chills
and Global Locks
(1) Section 17A(b)(3) and (5)
Under Section 17A, where a
registered clearing agency denies or
limits access to the agency’s services to
a ‘‘person,’’ it must employ ‘‘fair
procedures.’’ 20 Such procedures require
the clearing agency to give the person
notice and an opportunity to address the
specific grounds for denial or
prohibition or limitation and to keep a
record.21
In its decision in IPWG, the
Commission ruled, inter alia, that
issuers are ‘‘persons’’ for the purposes of
Section 17(a)(b)(3).
(i) Fair Procedures in Advance of the
Imposition of a Deposit Chill or Global
Lock
Section 17A does not specify the
nature of the fair procedures DTC must
provide to ‘‘persons,’’ including issuers.
In IPWG, the Commission observed that:
‘‘Exchange Act Section 17A(b)(5)(B) states
that, when a registered clearing agency
determines that ‘‘a person shall be . . .
prohibited or limited with respect to access
to services offered by the clearing agency, the
clearing agency shall notify such person of,
and give him an opportunity to be heard
upon, the specific grounds for . . .
19 See proposed Rule 22(A)(2)(c); see also Section
3.F.1. infra.
20 See Exchange Act, Section 17A(b)(3)(H); 15
U.S.C. 78q–1(b)(3)(H).
21 See Exchange Act, Section 17A(b)(5)(B); 15
U.S.C. 78q–1(b)(5)(B).
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Frm 00116
Fmt 4703
Sfmt 4703
prohibition or limitation under consideration
and keep a record.’’ 22
The Commission further ruled in
IPWG that DTC ‘‘should adopt
procedures that accord with the fairness
requirements of Section 17A(b)(3)(H),
which may be applied uniformly’’ in the
cases where DTC denies or limits
services with respect to an issuer’s
securities. Consistent with the
Commission’s broad directive, and as
set forth below in Sections 3F(1) and (2),
proposed Rules 22(A) and 22(B)
encompass uniform fair procedures for
issuers whose securities may be or are
subject to a Deposit Chill or Global
Lock. These procedures include:
• Advance notice (except as provided
in the following section) that a Deposit
Chill or Global Lock will be imposed;
• An explanation of the specific
grounds upon which the restrictions are
being or have been imposed;
• The actions that the issuer must
take in order to prevent or remove the
restriction;
• The process DTC will undertake to
review written submissions of the issuer
and to render a final decision
concerning the restriction; and
• Maintaining a complete record for
submission to the Commission in the
event an issuer appeals.
(ii) Fair Procedures Where a Deposit
Chill or Global Lock Is Imposed Without
Advance Notice
In IPWG, the Commission opined that,
when faced with justifiable
circumstances, DTC may design fair
procedures ‘‘in accordance with its own
internal needs and circumstances,’’ 23
recognizing that:
If DTC believes that circumstances
exist that justify imposing a suspension
of services with respect to an issuer’s
securities in advance of being able to
provide the issuer with notice and an
opportunity to be heard on the
suspension, it may do so. However, in
such circumstances, these processes
should balance the identifiable need for
emergency action with the issuer’s right
to fair procedures under the Exchange
Act. Under such procedures, DTC
would be authorized to act to avert an
imminent harm, but it could not
maintain such a suspension indefinitely
without providing expedited fair
process to the affected issuer.24
For example, where DTC’s monitoring
suggests that marketplace actors are
22 IPWG at https://www.sec.gov/litigation/
opinions/2012/34-66611.pdf.
23 Id. at 12, fn. 36.
24 Id. at 12–13 (footnote omitted); see also ATIG
at 3, fn. 5 (affirming that DTC may, consistent with
IPWG, impose a Deposit Chill or Global Lock
without advance notice in order to avert an
imminent harm).
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continuing to cause the deposit of
Eligible Securities that are not freelytradeable, DTC would need to act
quickly to stop further improper
deposits, and thus may impose a
restriction without prior notice.
Otherwise, if DTC were to provide prior
notice, marketplace actors would have
additional time to make such deposits
and accelerate the deposit volume
during the notice period. In these cases,
the risk of harm to the national
clearance and settlement system
stemming from comingling or further
comingling of non-freely tradeable
securities with DTC’s fungible bulk for
that issue outweighs any potential
impact on the issuer as a result of not
giving it advance notice of the
restriction.
As described below in Sections 3.F(1)
and (2), where a restriction is imposed
before notice in order to forestall, among
other things, imminent harm, injury or
other such consequence, DTC will
provide notice to the affected issuer
within three business days from the
imposition of the restriction. After DTC
has provided such notice, the affected
issuer is afforded the same fair
procedures as issuers that received
advance of a restriction.
F. Fair Procedures: Summary of
Proposed Rule Changes
DTC proposes to: (i) Adopt a new
Rule 22(A) that provides specific fair
procedures for issuers in connection
with imposition and release of Deposit
Chills; and (ii) adopt a new Rule 22(B)
that provides specific fair procedures for
issuers in connection with imposition
and release of Global Locks. DTC
additionally proposes to amend Rule 1,
Section 1 in the definition of
‘‘Procedures’’ to include, expressly, the
Operational Arrangements.25
The substantive elements of the
proposed rules are as follows:
emcdonald on DSK67QTVN1PROD with NOTICES
(1) Proposed Rule 22(A)
Section 1 provides that Rule 22(A)
sets forth the fair procedures available
to issuers where DTC intends to impose
or has imposed a Deposit Chill as a
result of DTC having detected large
volume deposits with respect to the
issuer’s Eligible Securities.
25 DTC’s existing Rule 22 is primarily focused on
procedures applicable to DTC’s Participants that are
facing disciplinary actions as a result of violating
DTC’s Rules. Rule 22, however, also sets forth the
fair procedures available to issuers where DTC
determines that an issuer’s Eligible Securities
should no longer be deemed to be such or, as
provided by Rule 5, where DTC determines not to
approve a security as an Eligible Security. Rule 22
does not address the fair procedures applicable to
issuers stemming from Deposit Chills or Global
Locks. DTC has determined to set forth such
procedures in the two proposed rules.
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Section 2 provides that issuers will be
given twenty business days’ advance
notice that DTC intends to impose a
Deposit Chill or, if DTC reasonably
determines that it is faced with, among
other things, imminent harm, injury or
other such consequence, to DTC or its
Participants, or where the Corporation
otherwise reasonably determines that
such action is necessary to protect the
prompt and accurate clearance and
settlement of securities transactions
through the Corporation, whether or not
such circumstances are otherwise
specified by Rule 22(A), notice will be
given within three business days after
the Deposit Chill has been imposed. In
addition to setting forth the contents of
the notice, Section 2(a) sets forth the
issuer’s right to contest the action by
submitting a response to the notice and
the time frame for doing so.
Section 2(b) requires, consistent with
DTC’s Operational Arrangements, that
the issuer support the response with a
legal opinion, prepared by independent
counsel, confirming that the issuer’s
securities deposited at DTC satisfy
DTC’s eligibility requirements. As
guidance for the issuer and its counsel,
DTC will provide a template legal
opinion. DTC will accept, from counsel
to the issuer reasonably acceptable to
DTC,26 an opinion that includes the
material opinions and other matters set
forth in the template.
Section 2(b)(i) provides that, in
response to the Deposit Chill Response,
DTC may present the issuer with a
request for additional information (the
‘‘Additional Request’’), to which the
issuer shall submit a response to the
Corporation (the ‘‘Additional
Response’’) in a time frame set by the
Corporation, which shall not be less
than 10 business days from the date of
the Additional Request.
Section 2(c) establishes the time frame
in which DTC will provide the issuer
with a written decision in connection
with the issuer’s timely response to
notice of the Deposit Chill. Specifically,
DTC will provide each issuer that
submits a Deposit Chill Response or
Additional Response with a written
decision within twenty business days
after DTC receives the Deposit Chill
Response or the Additional Response or,
in the case of a Deposit Chill imposed
before issuance of the Deposit Chill
Notice, within ten business days after
receipt by DTC of the Deposit Chill
Response or Additional Response.
26 In determining whether counsel is acceptable
for this purpose DTC refers to the relevant
provisions set forth in the Operational
Arrangements. See, supra, n.12.
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77759
Section 2(c) also provides that if the
issuer does not submit a response to the
notice or does not do so in a timely
matter, or if DTC reasonably determines
that the response does not establish that
the issuer’s securities on deposit at DTC
satisfy DTC’s eligibility requirements,
DTC will impose a Global Lock on the
issue. An officer of DTC who did not
play any role in the determination
regarding the Deposit Chill notice will
review the issuer’s response and decide
whether the response has satisfied
DTC’s eligibility standards. Once the
officer has made a decision: (i) If the
decision is in favor of the issuer, DTC
will not impose or will release the
Global Lock, as the case may be; or (ii)
if the decision is that the issuer’s
response is not satisfactory, DTC will
nevertheless not impose the Global Lock
until DTC has given the issuer notice of
the adverse decision and the
opportunity to demonstrate that DTC’s
determination was the result of DTC’s
clerical mistake or a mistake arising
from an oversight or omission in
reviewing the issuer’s response. This
added process will not constitute a
substantive review. It will be limited to
DTC making a determination whether,
as the issuer has asserted, there was a
clerical mistake or mistake arising from
an oversight or omission. Absent such a
showing, the Global Lock will be
imposed.
Section 2(d) specifies the contents of
the ‘‘record’’ in the event that the issuer
appeals to the Commission from an
adverse decision.
Section 3(a) provides that the issuer’s
right to respond to the notice is
dependent on compliance with the time
periods specified for making
submissions.
Section 3(b)(i) reserves to DTC the
right: (x) To lift a Deposit Chill, or (y)
to impose a Deposit Chill after it has
provided a Deposit Chill Notice but
before it has received or resolved a
Deposit Chill Response (including after
any Additional Request when an
Additional Response is pending)
without waiting for the applicable
notice periods to run, in either case, in
order to prevent imminent harm, injury
or other such consequences to DTC or
its Participants or where DTC
reasonably determines that such action
is necessary to protect the prompt and
accurate clearance and settlement of
securities transactions through it,
irrespective of whether Rule 22(A)
provides specific grounds for doing so.
Section 3(b)(ii) specifically provides
that Rule 22(A) does not apply to
processing interruptions based upon
ordinary course operational
requirements such as those in
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emcdonald on DSK67QTVN1PROD with NOTICES
connection with corporate actions and
reorganization events that may occur at
the request of the issuer or its
representatives, or other such
processing interruptions specifically set
forth in the Procedures.
Section 3(b)(iii) recognizes that Rule
22(A) shall not displace any legal or
regulatory requirements that DTC is
subject to under applicable law, rule or
regulation. This could conceivably
include imposing a Deposit Chill where
required by applicable law, rule or
regulation and for reasons that may not
include large volume deposits of low
value or thinly traded securities. If,
however, DTC imposed a Deposit Chill
under such circumstances, DTC would
afford the affected issuer the fair
procedures set forth in proposed Rule
22(A) (except if prohibited by law, rule
or regulation). Section 3(b)(iv)
emphasizes that while DTC may freely
communicate with the issuer or its
representative, substantive
communications must be in writing in
order to provide the Commission with a
complete record in the event of an
appeal.
Section 3(c) provides that in the event
that the Corporation shall impose a
Deposit Chill pursuant to Section 3(b)(i)
of Rule 22(A), the procedures contained
in Section 2(c) of Rule 22(A) shall
apply, including that the Corporation
shall provide the Deposit Chill
Response within ten (10) business days
after the Corporation receives the
Deposit Chill Response or the
Additional Response.
Section 3(d) sets forth the means by
which DTC shall send notice to the
issuer.
(2) Proposed Rule 22(B)
Section 1 provides that Rule 22(B)
sets forth the fair procedures available
to issuers where DTC imposes a Global
Lock with respect to an issuer’s Eligible
Securities, in two situations. Section
1(a) refers to a Global Lock based upon
an Enforcement Proceeding with respect
to an issue of securities that DTC
determines were deposited at DTC.
Section 1(b) refers to a Global Lock
where an issuer has failed to satisfy the
requirements to object to the imposition
of, or for lifting, a Deposit Chill
pursuant to Rule 22(A).
Section 2(a) provides that issuers will
be given twenty business days’ advance
notice that DTC intends to impose a
Global Lock or if DTC reasonably
determines that it is faced with, among
other things, imminent harm, injury or
other such consequence to itself or its
Participants, or where the Corporation
otherwise reasonably determines that
such action is necessary to protect the
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16:36 Dec 23, 2013
Jkt 232001
prompt and accurate clearance and
settlement of securities transactions
through the Corporation, whether or not
such circumstances are otherwise
specified by Rule 22(B), notice will be
given within three business days after
the Global Lock has been imposed. In
addition to setting forth the contents of
the notice, Section 2(a) sets forth the
issuer’s right to contest the action by
submitting a response to the notice and
the time frame for doing so.
Pursuant to Section 2(b)(i), if the
issuer is able to demonstrate that an
error had been made in identifying its
securities as the subject of the
underlying Enforcement Proceeding, the
Global Lock would not be imposed or,
had it already been imposed (whether
by virtue of being imposed without
notice or at any time after the
imposition of a Global Lock), it would
be released. Pursuant to Section 2(b)(ii),
if, at any time, the Enforcement
Proceeding has been withdrawn or
dismissed on the merits with prejudice
or otherwise resolved in a final, nonappealable judgment in favor of the
Defendants allegedly responsible for the
violations of Section 5 of the Securities
Act relating to the Eligible Securities,
the Global Lock would not be imposed
or, had if it had already been imposed,
it would be released. In reviewing the
issuer’s response, DTC will not provide
a forum for litigating or re-litigating the
allegations or findings in the
Enforcement Proceeding, provided,
however, that the issuer’s response may
include a demonstration that the
allegations or findings in the
Enforcement Proceeding have been
rejected by a court or that the issuer can
otherwise satisfy the criteria set forth in
Section 3 of proposed Rule 22(B).
Section 2(c) sets forth the time frame
in which DTC will provide the issuer
with a written decision responsive to
the Global Lock Response. Specifically,
DTC will provide each issuer that
submits a Global Lock Response with a
written decision within twenty business
days after DTC receives Global Lock
Response or, in the case of a Global
Lock imposed before issuance of the
Global Lock Notice, within ten business
days of its imposition.
Section 2(d) specifies the contents of
the ‘‘record’’ in the event that the issuer
appeals to the Commission from a
determination by DTC.
Section 3 provides for the release of
Global Locks. In the case of Global
Locks imposed pursuant to Section 1(a),
the restriction will be lifted either six
months or one year, as the case may be,
after the Enforcement Proceeding has
been withdrawn or dismissed on the
merits with prejudice or otherwise
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Frm 00118
Fmt 4703
Sfmt 4703
resolved in a final, non-appealable
judgment in favor of the Defendants
allegedly responsible for the violations
of Section 5 of the Securities Act
relating to the Eligible Securities. The
six-month period applies to affected
issuers that file periodic reports
pursuant to Section 13(a) and 15(d) of
the Exchange Act) and the one-year
period applies to issuers that are not
public reporting companies. In support
of the foregoing: (i) The Issuer may be
required to submit a legal opinion, in
form and substance satisfactory to the
Corporation, from independent
securities counsel to the issuer,
reasonably acceptable to the
Corporation, and/or (ii) such other
evidence or other documentation as the
Corporation may reasonably require.
Companies defined in Securities Act
Rule 144(i)(1) are not entitled to take
advantage of this procedure and the
Global Lock will remain in effect for any
shell company issuer, unless it
complies, or has complied, with the
requirements of Securities Act Rule
144(i)(2).
Section 4 is similar to Section 3,
except that the one-year and six-month
time frames are measured from the date
of the imposition of the Global Lock
pursuant to Section 1(b).
Section 5(a) provides that the issuer’s
right to respond to the notice is
dependent on compliance with the time
periods for making submissions.
Section 5(b)(i) reserves to DTC the
right: (x) To lift a Global Lock, or (y) to
impose a Global Lock after DTC has
provided a Global Lock Notice but
before it has received or resolved a
Global Lock Response without waiting
for the applicable notice periods to run,
in either case, in order to prevent
imminent harm, injury or other such
consequences to DTC or its Participants
or where DTC reasonably determines
that such action is necessary to protect
the prompt and accurate clearance and
settlement of securities transactions
through it, irrespective of whether Rule
22(B) provides specific grounds for
doing so. Section 5(b)(ii) specifically
provides that Rule 22(B) does not apply
to processing interruptions based upon
ordinary course operational
requirements such as those in
connection with corporate actions and
reorganization events that may occur at
the request of the issuer or its
representatives, or other such
processing interruptions set forth in the
Procedures.
Section 5(b)(iii) recognizes that Rule
22(B) shall not displace any legal or
regulatory requirements that DTC is
subject to under applicable law, rule or
regulation. This could conceivably
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include imposing a Global Lock where
required by applicable law, rule or
regulation and for reasons that may not
include an Enforcement Proceeding. If,
however, DTC imposed a Global Lock
under such circumstances, DTC would
afford the affected issuer the fair
procedures set forth in proposed Rule
22(B) (except if prohibited by law, rule
or regulation). Section 5(b)(iv) provides
that while DTC may freely communicate
with the issuer or its representative,
substantive communications must be in
writing in order to provide the
Commission with a complete record in
the event of an appeal.
Section 5(c) sets forth the means by
which DTC shall send notice to the
issuer.
Statutory Basis
emcdonald on DSK67QTVN1PROD with NOTICES
The proposed Rules 22(A) and (B)
establish a procedure which provides
for: (a) criteria for notice to an issuer
that a Deposit Chill or Global Lock will
be imposed, (b) an explanation of the
specific grounds upon which the
restrictions are being or have been
imposed, (c) the actions that the issuer
must take in order to prevent or remove
the restriction, (d) the process DTC will
undertake to review written
submissions of the issuer and to render
a final decision concerning the
restriction, and (e) maintenance of a
complete record for submission to the
Commission in the event an issuer
appeals. As such the proposed rule
change is in accordance with Section
17A(b)(5)(B) of the Act 27 and
encompasses a uniform procedure for
issuers whose securities may be or are
subject to a Deposit Chill or Global
Lock. Therefore, the proposed rule
change is consistent with the
requirements of the Section
17A(b)(3)(H) of the Act,28 which
requires that the rules of a registered
clearing agency are in accordance with
the provisions of Section 17A(b)(5)(B) of
the Act, and in general provide a fair
procedure with respect to the
prohibition or limitation by the clearing
agency of any person with respect to
27 See 15 U.S.C. 78q–1(b)(5)(B) which provides:
‘‘In any proceeding by a registered clearing agency
to determine whether a person shall be denied
participation or prohibited or limited with respect
to access to services offered by the clearing agency,
the clearing agency shall notify such person of, and
give him an opportunity to be heard upon, the
specific grounds for denial or prohibition or
limitation under consideration and keep a record.
A determination by the clearing agency to deny
participation or prohibit or limit a person with
respect to access to services offered by the clearing
agency shall be supported by a statement setting
forth the specific grounds on which the denial or
prohibition or limitation is based.
28 15 U.S.C. 78q–1(b)(3)(H).
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access to services offered by the clearing
agency.
(B) Self-Regulatory Organization’s
Statement on Burden on Competition
DTC does not believe that the
proposed rule changes will have any
impact on, or impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Exchange Act, because
the proposed procedures as described
above will apply to all issues that may
subject to Deposit Chill or Global Lock.
(C) Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments relating to the
proposed rule change have not yet been
solicited or received with respect to this
filing. To the extent DTC receives
written comments on the proposed Rule
change DTC will forward such
comments to the Commission.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the self-regulatory organization
consents, the Commission will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
77761
All submissions should refer to File
Number SR–DTC–2013–11. This file
number should be included on the
subject line if email is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such
filings also will be available for
inspection and copying at the principal
office of DTC and on DTC’s Web site at
https://dtcc.com/en/legal/sec-rulefilings.aspx. All comments received will
be posted without change; the
Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–DTC–
2013–11 and should be submitted on or
before January 14, 2014.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.29
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2013–30595 Filed 12–23–13; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71133; File No. SR–
NYSEArca–2013–111]
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
DTC–2013–11 on the subject line.
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Approving a
Proposed Rule Change To List and
Trade Shares of Manna Core Equity
Enhanced Dividend Income Fund
Under NYSE Arca Equities Rule 8.600
Paper Comments
December 18, 2013.
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
I. Introduction
On October 23, 2013, NYSE Arca, Inc.
(‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
PO 00000
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29 17
E:\FR\FM\24DEN1.SGM
CFR 200.30–3(a)(12).
24DEN1
]]>Agencies
[Federal Register Volume 78, Number 247 (Tuesday, December 24, 2013)]
[Notices]
[Pages 77755-77761]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-30595]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71132; File No. SR-DTC-2013-11]
Self-Regulatory Organizations; The Depository Trust Company;
Notice of Filing of Proposed Rule Change To Specify Procedures
Available to Issuers of Securities Deposited at DTC for Book Entry
Services When DTC Imposes or Intends To Impose Restrictions on the
Further Deposit and/or Book Entry Transfer of Those Securities
December 18, 2013.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on December 5, 2013, The Depository Trust Company (``DTC'') filed with
the Securities and Exchange Commission (``Commission'') the proposed
rule change described in Items I, II and III below, which Items have
been prepared by DTC. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Clearing Agency's Statement of the Terms of Substance of the
Proposed Rule Change
The proposed rule change modifies DTC's Rules & Procedures
(``Rules'') to specify procedures available to issuers of securities
deposited at DTC for book entry services when DTC imposes or intends to
impose restrictions on the further deposit and/or book entry transfer
of those securities, as more fully described below.
II. Clearing Agency's Statement of the Purpose of, and Statutory Basis
for, the Proposed Rule Change
In its filing with the Commission, DTC included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. DTC has prepared summaries, set forth in sections (A),
(B),
[[Page 77756]]
and (C) below, of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Purpose
A. Background: DTC's Role Under Section 17A of the Securities Exchange
Act of 1934, as amended (captioned ``National System for Clearance and
Settlement of Securities Transactions'')
DTC is the nation's central securities depository, registered as a
clearing agency under Section 17A of the Exchange Act (``Section
17A'').\3\ DTC performs services and maintains securities accounts for
its participants, primarily banks and broker dealers
(``Participants'').\4\ Among the services DTC provides to its
Participants, a Participant may present a Security (as defined in Rule
1, Section 1 of the DTC Rules) to be made eligible for DTC's depository
and book-entry services and, if the Security is accepted by DTC as
eligible for those services and is deposited with DTC for credit to the
securities account of a Participant, it becomes an ``Eligible
Security'' (as defined in Rule 1, Section 1 of the DTC Rules). (The
determination of eligibility is described more fully in Section 3.B.,
below.) Thereafter, other Participants may deposit that Eligible
Security into their respective DTC accounts. Once the Eligible Security
is credited to the account of one or more Participants, interests in
that Eligible Security may be transferred among Participants by book-
entry in accordance with the DTC Rules and Procedures.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 20221 (Sept. 23,
1983), 48 FR 45167 (Oct. 3, 1983).
\4\ See 15 U.S.C. 78c(a)(24).
---------------------------------------------------------------------------
As provided in the DTC Rules and Procedures, DTC processes the
transfer of interests in Eligible Securities among DTC Participants by
credits and debits to Participant accounts in accordance with the
instructions of delivering and receiving Participants who are parties
to the transaction. Participants in DTC agree to be bound by the Rules
and Procedures of DTC as a condition of membership.
To facilitate book-entry transfer and other services that DTC
provides for its Participants with respect to Deposited Securities (as
defined in Rule 1, Section 1 of the DTC Rules), Eligible Securities are
registered on the books of the issuer (typically, in a register
maintained by a transfer agent) in DTC's nominee name, Cede & Co.
Eligible Securities of an issue deposited at DTC are maintained in
``fungible bulk;'' i.e., each Participant to whose DTC account
securities of that issue have been credited has a pro rata
(proportionate) interest in DTC's entire inventory of that issue, but
none of the securities on deposit is identifiable to or ``owned'' by
any particular Participant.\5\
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\5\ See Securities Exchange Act Release No. 19678 (Apr. 15,
1983), 48 FR 17603, 17605, n.5 (Apr. 25, 1983) (describing fungible
bulk); see also N.Y. Uniform Commercial Code, Sec. 8-503, Off. Cmt
1 (``. . . all entitlement holders have a pro rata interest in
whatever positions in that financial asset the [financial]
intermediary holds'').
---------------------------------------------------------------------------
DTC's deposit and book-entry transfer services facilitate the
operation of the nation's securities markets. By serving as registered
holder of trillions of dollars of securities, DTC processes the
enormous volume of daily securities transactions by the book-entry
movement of interests, without the need to transfer physical
certificates.
The Commission has recognized that DTC plays a ``critical
function'' in the national system for securities clearance and
settlement.\6\ More recently, the federal Financial Stability Oversight
Council, which was established pursuant to the Dodd-Frank Wall Street
Reform and Consumer Protection Act, designated DTC as a Systemically
Important Financial Market Utility (as defined therein).\7\
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\6\ See Securities Exchange Act Release No. 47978, Order
Granting Approval of a Proposed Rule Change Concerning Requests for
Withdrawal of Certificates by Issuers, 68 Fed. Reg. 35037, 35041
(Jun. 4, 2003).
\7\ See https://www.treasury.gov/initiatives/fsoc/designations/Pages/default.aspx.
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B. Eligibility Standards for Securities are Set Forth in DTC Rules and
Procedures
In furtherance of Section 17A's requirement that DTC's Rules be
``designed to promote the prompt and accurate clearance and settlement
of securities transactions . . . and, in general, to protect investors
and the public interest,'' DTC's Rules and Procedures provide standards
for determining eligibility.\8\
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\8\ See DTC Rule 5, https://www.dtcc.com/legal/rules_proc/dtc_rules.pdf; see also Operational Arrangements (Jan. 2012), Section
I.A., available at https://www.dtcc.com/downloads/legal/rules_proc/eligibility/operational-arrangements.pdf.
---------------------------------------------------------------------------
DTC Rule 5 authorizes DTC to determine whether to accept a security
as an Eligible Security and when an Eligible Security will cease to be
such. DTC Rule 6 provides that DTC ``may limit certain services to
particular issues of Eligible Securities.''
DTC's Operational Arrangements, Section I.A.2., addresses specific
standards for making a security an Eligible Security:
Generally, the issues that may be made eligible for DTC's book-
entry delivery, settlement and depository services are those that have
been issued in a transaction that: (i) Has been registered with the
Commission pursuant to the Securities Act of 1933 (``Securities Act'');
(ii) was exempt from registration pursuant to a Securities Act
exemption that does not involve (or, at the time of the request for
eligibility no longer involves) transfer or ownership restrictions; or
(iii) permits resale of the securities pursuant to Rule 144A or
Regulation S and in all cases such securities otherwise meet DTC's
eligibility criteria.
Thus, an essential element of DTC eligibility is that the
securities are ``freely tradeable'' or, if restricted by Rule 144A or
Reg S, are processed through a separate program in which Participants
acknowledge and agree to comply with the applicable restrictions.
In determining whether deposited securities satisfy DTC's
eligibility requirements, Section I.B.2. of DTC's Operational
Arrangements provides that DTC may require an issuer to provide an
opinion from outside counsel in order ``to substantiate the legal basis
for eligibility.'' \9\ Additionally, DTC may require legal opinions,
inter alia, otherwise ``. . . to protect DTC and its Participants from
risk.'' \10\ That is, DTC may require the issuer's outside counsel to
provide a legal opinion in support of the eligibility determination.
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\9\ Section I.A.1 of the Operational Arrangements further
specifies that such counsel must be ``an experienced securities
practitioner, licensed to practice law in the relevant jurisdiction
and in good standing in any bar to which such practitioner is
admitted. Such counsel must be engaged in an independent private
practice (i.e., not in-house counsel) and may not have a beneficial
ownership interest in the security for which the opinion is being
provided or be an officer, director or employee of the Issuer. ''
\10\ Id.
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C. DTC's Compliance Monitoring Program and Imposition of Deposit Chills
and Global Locks
DTC maintains a robust system for monitoring its compliance with
governing law including, without limitation, the AML requirements of
the BSA, and OFAC sanctions.\11\
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\11\ See 31 U.S.C. 5318 (authorizing Secretary of the Treasury
to require financial institutions to establish AML procedures); 31
CFR 1020.210 (AML standards for certain financial institutions); 31
CFR 500.202 (prohibiting, inter alia, dealing in a security
registered in the name of a person subject to OFAC sanctions).
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Where such monitoring raises concerns as to whether securities held
at DTC have been distributed in violation of federal law including,
without limitation, the requirements of Section 5
[[Page 77757]]
of the Securities Act,\12\ DTC may impose a Deposit Chill or Global
Lock.
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\12\ See 15 U.S.C. 77e (prohibiting sales of unregistered
securities, subject to 15 U.S.C. 77(d)).
---------------------------------------------------------------------------
There are two principal scenarios under which DTC imposes these
restrictions, as described in more detail below.
(1) Deposit Chills: Large Volume Deposits
DTC is mindful that various regulatory agencies have identified
unusually large volumes of deposits of unregistered shares of low
priced or thinly-traded securities as a ``red flag'' for possible
unlawful distribution of securities.
For instance, in pursuing an enforcement action with respect to
illegal sales of penny stocks, the Commission has highlighted as
problematical ``sales that represented a high percentage of trading
volume or of an issuer's public float.'' \13\
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\13\ See e.g. Order Making Finding and Imposing Remedial
Sanctions, In the Matter of Ronald S. Bloomfield, et al., SEC Rel.
No. 62750 (Aug 20, 2010), available at https://www.sec.gov/litigation/admin/2010/34-62750.pdf (enumerating red flags relating
to how penny stocks were sold, including (a) repeated delivery in
and selling to the public of privately obtained shares of penny
stocks; (b) selling within weeks of receipt; (c) selling while
promotional activity was occurring; and (d) sales that represented a
high percentage of trading volume or of an issuer's public float).
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Similarly, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') has advised broker-dealers to be on alert for ``red flags''
of possible illegal distribution of unregistered securities. Although
DTC is not subject to FINRA oversight, DTC has nonetheless taken
account of FINRA's ``red flags'' in considering if Deposited Securities
continue to comply with DTC's eligibility requirements. As stated by
FINRA:
Recently, FINRA has investigated and brought several enforcement
actions concerning unregistered distributions of securities. A common
theme in these cases was that firms resold large amounts of low-priced
equity securities in over-the-counter transactions.
The following are examples of red flags of unlawful unregistered
distributions . . .;
A customer of the broker opens a new account and delivers
physical certificates representing a large block of thinly traded or
low-priced securities;
A customer of the broker deposits share certificates that
are recently issued or represent a large percentage of the float for
the security;
The company was a shell company when it issued the shares;
A customer of the broker with limited or no other assets
under management at the firm receives an electronic transfer or journal
transactions of large amounts of low-priced, unlisted securities;
The issuer has been through several recent name changes,
business combinations or recapitalizations, or the company's officers
are also officers of numerous similar companies;
The issuer's SEC filings are not current, are incomplete,
or nonexistent.\14\
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\14\ See Financial Industry Regulatory Authority, Inc.,
Regulatory Notice 09-05, available at https://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p117716.pdf
(footnotes omitted); see also Review of Disciplinary Action Taken by
FINRA, In the Matter of the Application of World Trade Financial
Corp., et al., Securities Exchange Act Release No. 66114, Jan. 6,
2012, available at https://sec.gov/litigation/opinions/2012/34-66114.pdf (sustaining FINRA violations and sanctions, where
customers deposited large blocks of recently issued, little known
stock into firm accounts and directed registered representative to
sell shortly thereafter, and registered representative failed to
inquire whether proposed sales qualified for exemption from
registration and were part of an unlawful distribution.); Order
Accepting Settlement, Dept. of Enforcement v. NevWest Securities
Corp et al., NASD Case No. E0220040112-01 (Mar. 13, 2007), available
at https://wwv.sec.gov/about/offices/ocie/am12007/nasdnev-nevwest.pdf
(finding that NevWest failed to adequately implement anti-money
laundering procedures by failing adequately to perform due
diligence, file Suspicious Activity Reports, or cease trading in
multiple accounts owned and controlled by customer, regarding over
500 transactions involving more than 250 billion shares of sub-penny
stock.)
---------------------------------------------------------------------------
The federal Financial Crimes Enforcement Network (``FinCen''),
which is responsible for enforcing the AML provisions of the BSA, has
similarly recognized that ``substantial deposit, transfer or journal of
very low-priced and thinly traded securities'' implicates anti-money
laundering monitoring concerns.\15\
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\15\ Financial Crimes Enforcement Network, The SAR Activity
Review: Trends Tips & Issues, Issue 15, pp. 23-25 (BSA Advisory
Group, May 2009), available at https://fincen.gov/news_room/rp/files/sar_tti_15.pdf, citing Financial Industry Regulatory
Authority, Inc., Regulatory Notice 09-05, available at https://www.finra.org/Industry/Regulation/Notices/2009/P117713; see also
Financial Crimes Enforcement Network, The Role of Domestic Shell
Companies in Financial Crime and Money Laundering (2006), available
at https://www.fincen.gov/LLCAssessment_FINAL.pdf (``These `pump and
dump' schemes often involve shell companies with low market
capitalization whose stock trades at pennies per share on the `pink
sheets' (www.pinksheets.com), OTC Bulletin Board, or other over-the-
counter trading and information systems. One indicator of this
scheme is concentrated trading in normally thinly traded stocks.'').
---------------------------------------------------------------------------
When DTC detects large volume deposits of a low-priced or thinly-
traded security, and its monitoring otherwise suggests that an issue
may not be freely-tradeable, it imposes a Deposit Chill on that issue.
The Deposit Chill blocks the deposit of further securities of the
issue, although other services, including book-entry transfer
movements, continue to be provided with respect to the Eligible
Securities deposited at DTC before the Deposit Chill.
Section 2 of proposed Rule 22(A) addresses the procedures by which
DTC gives affected issuers notice of a Deposit Chill and the procedures
they may follow to object to the restriction, under the standards
discussed in Section D(1), below.
Section 2 also provides that if an issuer fails to respond to a
notice of a Deposit Chill as required, or if DTC determines that the
response is insufficient to establish that Deposited Securities satisfy
DTC's eligibility requirements, a Global Lock will be instituted. Under
such circumstances, an issuer would be given notice of the impending
Global Lock and an opportunity to demonstrate that a response to the
Deposit Chill notice had, in fact, been submitted or that in reviewing
the response, DTC had made a clerical mistake or oversight.
(2) Global Locks: Enforcement Proceedings
When DTC becomes aware of a law-enforcement or regulatory
proceeding alleging violations of federal law or regulations (an
``Enforcement Proceeding''), particularly those alleging any violation
of Section 5 of the Securities Act, relating to securities of an issue
on deposit at DTC, DTC imposes a Global Lock on that issue. A Global
Lock prevents additional deposits and restricts all book-entry and
related depository services with respect to the issue.\16\
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\16\ Globally Locked Eligible Securities continue to be Eligible
Securities unless and until DTC makes a determination under its
Rules to terminate eligibility, as to which DTC Rule 22, Right to
Contest Decisions, would apply; alternatively, those securities may
be held in custody only at DTC, as provided in the DTC Rules and
Procedures applicable to custody only, i.e., not for book-entry
transfer and asset services applicable to Eligible Securities. See
generally https://www.dtcc.com/products/asset/services/custody.php#overview.
---------------------------------------------------------------------------
Sections 2, 3 and 4 of proposed Rule 22(B) address the procedures
by which DTC gives affected issuers notice of the Global Lock and the
procedures they may follow to object to the restriction, under the
standards discussed in Section D(2), below.
D. Grounds for Releasing Deposit Chills and Global Locks
The fair procedures set forth in proposed Rules 22(A) and (B) are
designed to enable issuers to object to a Deposit Chill or Global Lock
prior to imposition of the restriction by DTC or
[[Page 77758]]
to cause DTC to release Deposit Chills and Global Locks imposed without
such prior notice or at any time during the continuance of any such
restriction, pursuant to the standards set forth below.
(1) Release of Deposit Chills
In order to challenge a Deposit Chill, proposed Rule 22(A) provides
the affected issuer with the opportunity to establish that the issue
meets DTC's eligibility requirements, including by submitting an
opinion from independent legal counsel establishing that the securities
deposited at DTC are freely tradeable. DTC's reliance on legal opinions
for this purpose is authorized by DTC's Operational Arrangements, which
expressly authorize DTC to require opinions ``to substantiate the legal
basis for eligibility,'' or otherwise ``. . . to protect DTC and its
Participants from risk.'' \17\ If the issuer successfully demonstrates
that the deposited securities continue to satisfy DTC's eligibility
requirements, DTC would not impose the Deposit Chill or, if already in
effect, would release it.
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\17\ See, supra, n.11; see also DTC Rule 5 (providing that DTC
``shall accept a Security as an Eligible Security only . . . upon
such inquiry, or based upon such criteria, as the Corporation may,
in its sole discretion, determine from time to time.'').
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(2) Release of Global Locks
In order to challenge a Global Lock, proposed Rule 22(B)(2)(b)
provides the affected issuer with the opportunity to establish that (i)
DTC has made a mistake in associating the issuer's Eligible Securities
with the specified Enforcement Proceeding or (ii) that the Enforcement
Proceeding has been has been withdrawn or dismissed on the merits with
prejudice or otherwise resolved in a final, non-appealable judgment in
favor of the defendants allegedly responsible for the alleged
violations of Section 5 of the Securities Act relating to the Eligible
Securities. If the issuer successfully demonstrates either factor, DTC
would not impose the Global Lock or, if already in effect, DTC would
release it.
Otherwise, proposed Rule 22(B)(3) provides that DTC will release a
Global Lock within either one year or six months, as the case may
be,\18\ after the final disposition of the Enforcement Proceeding with
respect to those defendants alleged to have been responsible for the
illegal distribution of the Eligible Securities that were subject to
the Global Lock. Similarly, pursuant to proposed Rule 22(B)(4), where a
Global Lock has been imposed because an issuer has failed to satisfy
DTC's concerns that led to a Deposit Chill,\19\ the one year/six month
waiting period also applies, but runs from the date of the imposition
of the Global Lock.
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\18\ Six months applies to issuers that are required to file,
and have filed, all reports pursuant to Sections 13(a) or 15(d) of
the Exchange Act, and one year applies to issuers that are not
publicly reporting.
\19\ See proposed Rule 22(A)(2)(c); see also Section 3.F.1.
infra.
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The proposed standard to release a Global Lock after the passage of
six months or one year (from the appropriate starting date) was
developed by analogy to the safe harbor provision of the Securities
Act, Rule 144, which, under certain circumstances, permits the
unregistered resale of restricted securities (as defined under
paragraph (a)(3) of the Rule) after expiration of the relevant holding
period. However, again by reference to Rule 144, this approach is not
applicable to an issuer that is, or was, a shell company as defined in
Rule 144(i)(1), unless the issuer has filed the specified disclosure
required by Rule 144(i)(2).
E. Legal Principles Underlying Fair Procedures Challenging Deposit
Chills and Global Locks
(1) Section 17A(b)(3) and (5)
Under Section 17A, where a registered clearing agency denies or
limits access to the agency's services to a ``person,'' it must employ
``fair procedures.'' \20\ Such procedures require the clearing agency
to give the person notice and an opportunity to address the specific
grounds for denial or prohibition or limitation and to keep a
record.\21\
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\20\ See Exchange Act, Section 17A(b)(3)(H); 15 U.S.C. 78q-
1(b)(3)(H).
\21\ See Exchange Act, Section 17A(b)(5)(B); 15 U.S.C. 78q-
1(b)(5)(B).
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In its decision in IPWG, the Commission ruled, inter alia, that
issuers are ``persons'' for the purposes of Section 17(a)(b)(3).
(i) Fair Procedures in Advance of the Imposition of a Deposit Chill or
Global Lock
Section 17A does not specify the nature of the fair procedures DTC
must provide to ``persons,'' including issuers. In IPWG, the Commission
observed that:
``Exchange Act Section 17A(b)(5)(B) states that, when a
registered clearing agency determines that ``a person shall be . . .
prohibited or limited with respect to access to services offered by
the clearing agency, the clearing agency shall notify such person
of, and give him an opportunity to be heard upon, the specific
grounds for . . . prohibition or limitation under consideration and
keep a record.'' \22\
\22\ IPWG at https://www.sec.gov/litigation/opinions/2012/34-66611.pdf.
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The Commission further ruled in IPWG that DTC ``should adopt
procedures that accord with the fairness requirements of Section
17A(b)(3)(H), which may be applied uniformly'' in the cases where DTC
denies or limits services with respect to an issuer's securities.
Consistent with the Commission's broad directive, and as set forth
below in Sections 3F(1) and (2), proposed Rules 22(A) and 22(B)
encompass uniform fair procedures for issuers whose securities may be
or are subject to a Deposit Chill or Global Lock. These procedures
include:
Advance notice (except as provided in the following
section) that a Deposit Chill or Global Lock will be imposed;
An explanation of the specific grounds upon which the
restrictions are being or have been imposed;
The actions that the issuer must take in order to prevent
or remove the restriction;
The process DTC will undertake to review written
submissions of the issuer and to render a final decision concerning the
restriction; and
Maintaining a complete record for submission to the
Commission in the event an issuer appeals.
(ii) Fair Procedures Where a Deposit Chill or Global Lock Is Imposed
Without Advance Notice
In IPWG, the Commission opined that, when faced with justifiable
circumstances, DTC may design fair procedures ``in accordance with its
own internal needs and circumstances,'' \23\ recognizing that:
---------------------------------------------------------------------------
\23\ Id. at 12, fn. 36.
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If DTC believes that circumstances exist that justify imposing a
suspension of services with respect to an issuer's securities in
advance of being able to provide the issuer with notice and an
opportunity to be heard on the suspension, it may do so. However, in
such circumstances, these processes should balance the identifiable
need for emergency action with the issuer's right to fair procedures
under the Exchange Act. Under such procedures, DTC would be authorized
to act to avert an imminent harm, but it could not maintain such a
suspension indefinitely without providing expedited fair process to the
affected issuer.\24\
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\24\ Id. at 12-13 (footnote omitted); see also ATIG at 3, fn. 5
(affirming that DTC may, consistent with IPWG, impose a Deposit
Chill or Global Lock without advance notice in order to avert an
imminent harm).
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For example, where DTC's monitoring suggests that marketplace
actors are
[[Page 77759]]
continuing to cause the deposit of Eligible Securities that are not
freely-tradeable, DTC would need to act quickly to stop further
improper deposits, and thus may impose a restriction without prior
notice. Otherwise, if DTC were to provide prior notice, marketplace
actors would have additional time to make such deposits and accelerate
the deposit volume during the notice period. In these cases, the risk
of harm to the national clearance and settlement system stemming from
comingling or further comingling of non-freely tradeable securities
with DTC's fungible bulk for that issue outweighs any potential impact
on the issuer as a result of not giving it advance notice of the
restriction.
As described below in Sections 3.F(1) and (2), where a restriction
is imposed before notice in order to forestall, among other things,
imminent harm, injury or other such consequence, DTC will provide
notice to the affected issuer within three business days from the
imposition of the restriction. After DTC has provided such notice, the
affected issuer is afforded the same fair procedures as issuers that
received advance of a restriction.
F. Fair Procedures: Summary of Proposed Rule Changes
DTC proposes to: (i) Adopt a new Rule 22(A) that provides specific
fair procedures for issuers in connection with imposition and release
of Deposit Chills; and (ii) adopt a new Rule 22(B) that provides
specific fair procedures for issuers in connection with imposition and
release of Global Locks. DTC additionally proposes to amend Rule 1,
Section 1 in the definition of ``Procedures'' to include, expressly,
the Operational Arrangements.\25\
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\25\ DTC's existing Rule 22 is primarily focused on procedures
applicable to DTC's Participants that are facing disciplinary
actions as a result of violating DTC's Rules. Rule 22, however, also
sets forth the fair procedures available to issuers where DTC
determines that an issuer's Eligible Securities should no longer be
deemed to be such or, as provided by Rule 5, where DTC determines
not to approve a security as an Eligible Security. Rule 22 does not
address the fair procedures applicable to issuers stemming from
Deposit Chills or Global Locks. DTC has determined to set forth such
procedures in the two proposed rules.
---------------------------------------------------------------------------
The substantive elements of the proposed rules are as follows:
(1) Proposed Rule 22(A)
Section 1 provides that Rule 22(A) sets forth the fair procedures
available to issuers where DTC intends to impose or has imposed a
Deposit Chill as a result of DTC having detected large volume deposits
with respect to the issuer's Eligible Securities.
Section 2 provides that issuers will be given twenty business days'
advance notice that DTC intends to impose a Deposit Chill or, if DTC
reasonably determines that it is faced with, among other things,
imminent harm, injury or other such consequence, to DTC or its
Participants, or where the Corporation otherwise reasonably determines
that such action is necessary to protect the prompt and accurate
clearance and settlement of securities transactions through the
Corporation, whether or not such circumstances are otherwise specified
by Rule 22(A), notice will be given within three business days after
the Deposit Chill has been imposed. In addition to setting forth the
contents of the notice, Section 2(a) sets forth the issuer's right to
contest the action by submitting a response to the notice and the time
frame for doing so.
Section 2(b) requires, consistent with DTC's Operational
Arrangements, that the issuer support the response with a legal
opinion, prepared by independent counsel, confirming that the issuer's
securities deposited at DTC satisfy DTC's eligibility requirements. As
guidance for the issuer and its counsel, DTC will provide a template
legal opinion. DTC will accept, from counsel to the issuer reasonably
acceptable to DTC,\26\ an opinion that includes the material opinions
and other matters set forth in the template.
---------------------------------------------------------------------------
\26\ In determining whether counsel is acceptable for this
purpose DTC refers to the relevant provisions set forth in the
Operational Arrangements. See, supra, n.12.
---------------------------------------------------------------------------
Section 2(b)(i) provides that, in response to the Deposit Chill
Response, DTC may present the issuer with a request for additional
information (the ``Additional Request''), to which the issuer shall
submit a response to the Corporation (the ``Additional Response'') in a
time frame set by the Corporation, which shall not be less than 10
business days from the date of the Additional Request.
Section 2(c) establishes the time frame in which DTC will provide
the issuer with a written decision in connection with the issuer's
timely response to notice of the Deposit Chill. Specifically, DTC will
provide each issuer that submits a Deposit Chill Response or Additional
Response with a written decision within twenty business days after DTC
receives the Deposit Chill Response or the Additional Response or, in
the case of a Deposit Chill imposed before issuance of the Deposit
Chill Notice, within ten business days after receipt by DTC of the
Deposit Chill Response or Additional Response.
Section 2(c) also provides that if the issuer does not submit a
response to the notice or does not do so in a timely matter, or if DTC
reasonably determines that the response does not establish that the
issuer's securities on deposit at DTC satisfy DTC's eligibility
requirements, DTC will impose a Global Lock on the issue. An officer of
DTC who did not play any role in the determination regarding the
Deposit Chill notice will review the issuer's response and decide
whether the response has satisfied DTC's eligibility standards. Once
the officer has made a decision: (i) If the decision is in favor of the
issuer, DTC will not impose or will release the Global Lock, as the
case may be; or (ii) if the decision is that the issuer's response is
not satisfactory, DTC will nevertheless not impose the Global Lock
until DTC has given the issuer notice of the adverse decision and the
opportunity to demonstrate that DTC's determination was the result of
DTC's clerical mistake or a mistake arising from an oversight or
omission in reviewing the issuer's response. This added process will
not constitute a substantive review. It will be limited to DTC making a
determination whether, as the issuer has asserted, there was a clerical
mistake or mistake arising from an oversight or omission. Absent such a
showing, the Global Lock will be imposed.
Section 2(d) specifies the contents of the ``record'' in the event
that the issuer appeals to the Commission from an adverse decision.
Section 3(a) provides that the issuer's right to respond to the
notice is dependent on compliance with the time periods specified for
making submissions.
Section 3(b)(i) reserves to DTC the right: (x) To lift a Deposit
Chill, or (y) to impose a Deposit Chill after it has provided a Deposit
Chill Notice but before it has received or resolved a Deposit Chill
Response (including after any Additional Request when an Additional
Response is pending) without waiting for the applicable notice periods
to run, in either case, in order to prevent imminent harm, injury or
other such consequences to DTC or its Participants or where DTC
reasonably determines that such action is necessary to protect the
prompt and accurate clearance and settlement of securities transactions
through it, irrespective of whether Rule 22(A) provides specific
grounds for doing so. Section 3(b)(ii) specifically provides that Rule
22(A) does not apply to processing interruptions based upon ordinary
course operational requirements such as those in
[[Page 77760]]
connection with corporate actions and reorganization events that may
occur at the request of the issuer or its representatives, or other
such processing interruptions specifically set forth in the Procedures.
Section 3(b)(iii) recognizes that Rule 22(A) shall not displace any
legal or regulatory requirements that DTC is subject to under
applicable law, rule or regulation. This could conceivably include
imposing a Deposit Chill where required by applicable law, rule or
regulation and for reasons that may not include large volume deposits
of low value or thinly traded securities. If, however, DTC imposed a
Deposit Chill under such circumstances, DTC would afford the affected
issuer the fair procedures set forth in proposed Rule 22(A) (except if
prohibited by law, rule or regulation). Section 3(b)(iv) emphasizes
that while DTC may freely communicate with the issuer or its
representative, substantive communications must be in writing in order
to provide the Commission with a complete record in the event of an
appeal.
Section 3(c) provides that in the event that the Corporation shall
impose a Deposit Chill pursuant to Section 3(b)(i) of Rule 22(A), the
procedures contained in Section 2(c) of Rule 22(A) shall apply,
including that the Corporation shall provide the Deposit Chill Response
within ten (10) business days after the Corporation receives the
Deposit Chill Response or the Additional Response.
Section 3(d) sets forth the means by which DTC shall send notice to
the issuer.
(2) Proposed Rule 22(B)
Section 1 provides that Rule 22(B) sets forth the fair procedures
available to issuers where DTC imposes a Global Lock with respect to an
issuer's Eligible Securities, in two situations. Section 1(a) refers to
a Global Lock based upon an Enforcement Proceeding with respect to an
issue of securities that DTC determines were deposited at DTC. Section
1(b) refers to a Global Lock where an issuer has failed to satisfy the
requirements to object to the imposition of, or for lifting, a Deposit
Chill pursuant to Rule 22(A).
Section 2(a) provides that issuers will be given twenty business
days' advance notice that DTC intends to impose a Global Lock or if DTC
reasonably determines that it is faced with, among other things,
imminent harm, injury or other such consequence to itself or its
Participants, or where the Corporation otherwise reasonably determines
that such action is necessary to protect the prompt and accurate
clearance and settlement of securities transactions through the
Corporation, whether or not such circumstances are otherwise specified
by Rule 22(B), notice will be given within three business days after
the Global Lock has been imposed. In addition to setting forth the
contents of the notice, Section 2(a) sets forth the issuer's right to
contest the action by submitting a response to the notice and the time
frame for doing so.
Pursuant to Section 2(b)(i), if the issuer is able to demonstrate
that an error had been made in identifying its securities as the
subject of the underlying Enforcement Proceeding, the Global Lock would
not be imposed or, had it already been imposed (whether by virtue of
being imposed without notice or at any time after the imposition of a
Global Lock), it would be released. Pursuant to Section 2(b)(ii), if,
at any time, the Enforcement Proceeding has been withdrawn or dismissed
on the merits with prejudice or otherwise resolved in a final, non-
appealable judgment in favor of the Defendants allegedly responsible
for the violations of Section 5 of the Securities Act relating to the
Eligible Securities, the Global Lock would not be imposed or, had if it
had already been imposed, it would be released. In reviewing the
issuer's response, DTC will not provide a forum for litigating or re-
litigating the allegations or findings in the Enforcement Proceeding,
provided, however, that the issuer's response may include a
demonstration that the allegations or findings in the Enforcement
Proceeding have been rejected by a court or that the issuer can
otherwise satisfy the criteria set forth in Section 3 of proposed Rule
22(B).
Section 2(c) sets forth the time frame in which DTC will provide
the issuer with a written decision responsive to the Global Lock
Response. Specifically, DTC will provide each issuer that submits a
Global Lock Response with a written decision within twenty business
days after DTC receives Global Lock Response or, in the case of a
Global Lock imposed before issuance of the Global Lock Notice, within
ten business days of its imposition.
Section 2(d) specifies the contents of the ``record'' in the event
that the issuer appeals to the Commission from a determination by DTC.
Section 3 provides for the release of Global Locks. In the case of
Global Locks imposed pursuant to Section 1(a), the restriction will be
lifted either six months or one year, as the case may be, after the
Enforcement Proceeding has been withdrawn or dismissed on the merits
with prejudice or otherwise resolved in a final, non-appealable
judgment in favor of the Defendants allegedly responsible for the
violations of Section 5 of the Securities Act relating to the Eligible
Securities. The six-month period applies to affected issuers that file
periodic reports pursuant to Section 13(a) and 15(d) of the Exchange
Act) and the one-year period applies to issuers that are not public
reporting companies. In support of the foregoing: (i) The Issuer may be
required to submit a legal opinion, in form and substance satisfactory
to the Corporation, from independent securities counsel to the issuer,
reasonably acceptable to the Corporation, and/or (ii) such other
evidence or other documentation as the Corporation may reasonably
require. Companies defined in Securities Act Rule 144(i)(1) are not
entitled to take advantage of this procedure and the Global Lock will
remain in effect for any shell company issuer, unless it complies, or
has complied, with the requirements of Securities Act Rule 144(i)(2).
Section 4 is similar to Section 3, except that the one-year and
six-month time frames are measured from the date of the imposition of
the Global Lock pursuant to Section 1(b).
Section 5(a) provides that the issuer's right to respond to the
notice is dependent on compliance with the time periods for making
submissions.
Section 5(b)(i) reserves to DTC the right: (x) To lift a Global
Lock, or (y) to impose a Global Lock after DTC has provided a Global
Lock Notice but before it has received or resolved a Global Lock
Response without waiting for the applicable notice periods to run, in
either case, in order to prevent imminent harm, injury or other such
consequences to DTC or its Participants or where DTC reasonably
determines that such action is necessary to protect the prompt and
accurate clearance and settlement of securities transactions through
it, irrespective of whether Rule 22(B) provides specific grounds for
doing so. Section 5(b)(ii) specifically provides that Rule 22(B) does
not apply to processing interruptions based upon ordinary course
operational requirements such as those in connection with corporate
actions and reorganization events that may occur at the request of the
issuer or its representatives, or other such processing interruptions
set forth in the Procedures.
Section 5(b)(iii) recognizes that Rule 22(B) shall not displace any
legal or regulatory requirements that DTC is subject to under
applicable law, rule or regulation. This could conceivably
[[Page 77761]]
include imposing a Global Lock where required by applicable law, rule
or regulation and for reasons that may not include an Enforcement
Proceeding. If, however, DTC imposed a Global Lock under such
circumstances, DTC would afford the affected issuer the fair procedures
set forth in proposed Rule 22(B) (except if prohibited by law, rule or
regulation). Section 5(b)(iv) provides that while DTC may freely
communicate with the issuer or its representative, substantive
communications must be in writing in order to provide the Commission
with a complete record in the event of an appeal.
Section 5(c) sets forth the means by which DTC shall send notice to
the issuer.
Statutory Basis
The proposed Rules 22(A) and (B) establish a procedure which
provides for: (a) criteria for notice to an issuer that a Deposit Chill
or Global Lock will be imposed, (b) an explanation of the specific
grounds upon which the restrictions are being or have been imposed, (c)
the actions that the issuer must take in order to prevent or remove the
restriction, (d) the process DTC will undertake to review written
submissions of the issuer and to render a final decision concerning the
restriction, and (e) maintenance of a complete record for submission to
the Commission in the event an issuer appeals. As such the proposed
rule change is in accordance with Section 17A(b)(5)(B) of the Act \27\
and encompasses a uniform procedure for issuers whose securities may be
or are subject to a Deposit Chill or Global Lock. Therefore, the
proposed rule change is consistent with the requirements of the Section
17A(b)(3)(H) of the Act,\28\ which requires that the rules of a
registered clearing agency are in accordance with the provisions of
Section 17A(b)(5)(B) of the Act, and in general provide a fair
procedure with respect to the prohibition or limitation by the clearing
agency of any person with respect to access to services offered by the
clearing agency.
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\27\ See 15 U.S.C. 78q-1(b)(5)(B) which provides: ``In any
proceeding by a registered clearing agency to determine whether a
person shall be denied participation or prohibited or limited with
respect to access to services offered by the clearing agency, the
clearing agency shall notify such person of, and give him an
opportunity to be heard upon, the specific grounds for denial or
prohibition or limitation under consideration and keep a record. A
determination by the clearing agency to deny participation or
prohibit or limit a person with respect to access to services
offered by the clearing agency shall be supported by a statement
setting forth the specific grounds on which the denial or
prohibition or limitation is based.
\28\ 15 U.S.C. 78q-1(b)(3)(H).
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(B) Self-Regulatory Organization's Statement on Burden on Competition
DTC does not believe that the proposed rule changes will have any
impact on, or impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act, because
the proposed procedures as described above will apply to all issues
that may subject to Deposit Chill or Global Lock.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments relating to the proposed rule change have not yet
been solicited or received with respect to this filing. To the extent
DTC receives written comments on the proposed Rule change DTC will
forward such comments to the Commission.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-DTC-2013-11 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-DTC-2013-11. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of such filings also will be available
for inspection and copying at the principal office of DTC and on DTC's
Web site at https://dtcc.com/en/legal/sec-rule-filings.aspx. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-DTC-2013-11 and should be
submitted on or before January 14, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
Kevin M. O'Neill,
Deputy Secretary.
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\29\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2013-30595 Filed 12-23-13; 8:45 am]
BILLING CODE 8011-01-P
